Document: 72 L.Ed.2d 777 102 S.Ct. 2414 457 U.S. 191 Victor P. DIEDRICH et ux., Petitionersv.COMMISSIONER OF INTERNAL REVENUE. UNITED MISSOURI BANK KANSAS v. COMMISSIONER No. 80-2204. Argued Feb. 24, 1982. Decided June 15, Syllabus ¢s191¢s Held : A donor (such as petitioner husband and wife executor's decedent) who makes a gift of property on condition that the donee pay resulting taxes realizes taxable income to extent paid by exceed donor's adjusted basis in property. Pp. 194-200. (a) The substance, not form, agreed transaction controls determining whether was realized. Old Colony Trust Co. Commissioner, 279 716, 49 499, 73 L.Ed. 918; Crane 331 1, 67 1047, 91 1301. 2417-2418. (b) When gift, he incurs "debt" United States for amount whatever are due, which much legal obligation his taxes. conditional gifts, such those question here, made, an immediate economic benefit donee's assumption Subjective intent, while relevant has been is characteristically factor individual realized income. Even if intent were factor, shifting tax plainly relieve debt owed States. And diminished fact liability attaches during course donative transfer, being indistinguishable from arising discharge pre-existing obligation. 196-198. (c) Treating consistent with § 1001 Internal Revenue Code, provides gain disposition excess over transferor's 198-199. 8th Cir., 643 F.2d affirmed. Norman E. Beal, Kansas City, Mo., petitioners. Stuart A. Smith, Washington, D. C., respondent. Chief Justice BURGER delivered opinion Court. 1 We granted certiorari resolve Circuit conflict receives exceeds transferred. 454 813, 89, 70 82 (1981). Court Appeals Eighth held 499 affirm. 2 * 3 Diedrich Commissioner 4 In 1972 petitioners Frances made gifts approximately 85,000 shares stock their three children, using both direct transfer trust arrangement. subject donees federal state There no dispute concerning donees. donors' transferred $51,073; $62,992. Petitioners did include returns any portion After audit determined had but exceeded Accordingly, petitioners' increased $5,959.1 filed petition Tax redetermination deficiencies. taxpayers, concluding 39 TCM 433 (1979). B 5 Missouri Bank City 6 1970 1971 Mrs. Grant gave 90,000 voting certificates her son tax. Grant's $8,742.60; $232,620.09. As Diedrich, there or its payment pursuant condition. 7 Like Diedrichs, donee. auditing returns, part sale, result $112,000.2 taxpayer, 1088 (1980). C 8 consolidated two appeals reversed, "to donees" bases transferred, "the donors income." F.2d, at 504. rejected Court's conclusion taxpayers merely "net gift" difference between fair market value court reasoned when discharges rejecting holding Turner T.C. 356 (1968), aff'd per curiam, 410 752 (CA6 1969), progeny, adopted approach Johnson 59 791 (1973), aff'd, 495 1079 (CA6), cert. denied, 419 1040, 95 527, 42 317 (1974), Estate Levine 780 (1979), 634 12 (CA2 1980). this conflict, (1981), we II 9 Pursuant constitutional authority, Congress defined "gross income" "from source derived," including "[i]ncome indebtedness." 26 U.S.C. 61(12).3 This recognized "income" may be variety indirect means. 918 (1929), employee's employer constituted employee. Speaking Court, Taft concluded "[t]he employe[r] consideration services rendered employee derived labor." Id., 729, clear controls. "The third person him equivalent receipt taxed." Ibid. employee, other words, placed better position employer's taxes; thus received 10 reaffirmed 1301 (1947). relief nonrecourse mortgage taxpayer. taxpayer acquired depreciable property, apartment building, unassumed mortgage. later sold still mortgage, cash plus buyer's properly included noting transfers 11 real substantial discharged, personal equal assumed another." 14, 1054.4 Again, it "reality," governed. found immaterial seller money prior sale order either case benefit. 13 principles control.5 common method structuring transactions make tax, done each cases now before us. falls under 2502(d).6 donee, incurred donor. Those these purposes they same kind Colony, supra. Similarly, agrees indebtedness relieved short, 14 An examination does change character Although subjective income.7 respect States; choice because would receive tax.8 15 Finally, transfer. It cannot doubted aware arise immediately upon property; preexisting Nor doubt raise funds expected have 1001. discharged way rather than pregift alter underlying donors. 16 Consistent reality, treated through sells less value. "sale" price necessary indebtedness; balance gift. entire treatment property.9 III 17 recognize structured encourage limiting consequences See,e.g., (gifts excluded gross income). obviously provide similar exclusion Should wish gifts," changes lie within legislative responsibility. Until time, bound Congress' mandate includes derived." therefore hold property.10 18 judgment 19 Affirmed. 20 REHNQUIST, dissenting. 21 well-settled principle today another relieves connection otherwise transaction. See (1947) (sale property); (1929) (employment compensation). neither nor existence transaction; only concerned case, however, begs taken place all concludes control" case. Ante, 196. 22 compensation. provided exchange compensation undeniably liability. 23 Crane, Clearly occurred, buyer should taxpayer's contention what she itself, equity 24 Unlike concededly transaction, all. Only after one partial occurs do become ascertaining Nowhere explain why becomes structure so imposed 25 my view, resolution turns congressional intent: intended characterize whenever considered 102. Instead, system wholly separate distinct 2501 seq. Both liable §§ 2502(d), 6324(b). primary donor, fail I see evidence statutes forbade parties agree among themselves pain agreement event could certainly determine constitutes affirmatively indicate determination. dissent. Subtracting $51,073 $62,992, long-term capital $11,919. 50% reduction gain, 1202, Diedrichs' $5,959. $232,630.09. $8,742.60, $223,887.49. $111,943.75. During pendency lawsuit, died decedent's executor, substituted petitioner. Constitution shall power lay collect Art. I, 8, cl. 1; Amend. 16. Helvering Bruun, 309 461, 469, 60 631, 634, 84 864 (1940), noted: "While true always income, settled realization need asset. Gain occur indebtedness, liability, profit completion transaction." (Emphasis supplied.) favorable loan allowed depreciation then escape taxation having benefits another. Whether time here. U.S., n. 37, S.Ct., 1054, 37. argued consistently results several courts interpretation. See, e.g., 1969); Hirst 572 427 (CA4 1978) (en banc). Cf. (1974). noted will unaffected "net" given, attributable deducted Rev.Rul. 75-72, 1975-1 Cum.Bull. 310 (general formula computation gift); 71-232, 1971-1 275. section donor." Section 6321 imposes lien due. secondarily responsible limited responsibility analogous security. also S.Rep.No. 665, 72d Cong., 1st Sess., (1932); H.R.Rep.No. 708, 30 (1932). Several highly significant supra; enough, simply remain pays above, Duberstein, 363 278, 286, 80 1190, 1197, 1218 (1960), characterization action determinative." Minnesota Tea Helvering, 302 609, 613, 58 393, 394, 474 (1938) ("A given end straight path different reached following devious path"). "condition" assumes precludes back enable larger sum possible due factors differing brackets provides: "(a) Computation loss.—The therefrom 1011 loss "(b) Amount realized.—The (other money) received. . "By treating appreciated greater basis." argue even holds basis, applied prospectively apply dispositive decision review. addition, frequently decisions altered law clarified facts it. Donnelly, 397 294-295, 90 1033, 1038, 312 (1970).

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