Court Opinion

ID: 9463320
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:02:47.234812+00
Date Added: 2024-06-11T17:38:01.456536
License: Public Domain

WILLIAM E. DOYLE,
Circuit Judge (dissenting).
I respectfully dissent from the decision of the majority of the court that the transaction in question was a sale and not a gift subject to gift tax. The several differences follow.
I.
I disagree with the majority’s ruling that intent of Mr. King governed the entire transaction and was a factual matter which had the effect of rendering the finding unimpeachable.
The source of my disagreement on this ground is that intent of the donor is not the determining factor in deciding whether it is a gift or sale. Treas.Reg. Section 25.2511-1(g)(1) (26 C.F.R.) provides as follows:
Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor. (Emphasis supplied.)

Id.

Also, the Supreme Court said in this regard in Commissioner of Internal Revenue v. Wemyss, 324 U.S. 303, 306, 65 S.Ct. 652, 89 L.Ed. 958 (1945), that: “Congress chose not to require an ascertainment of what too often is an elusive state of mind.” See also Commissioner of Internal Revenue v. Berger, 201 F.2d 171 (2d Cir. 1953). . Thus, even if the taxpayer expresses an intent to make a sale, which is questionable evidence in most instances, the inquiry does not end there. The court as a matter of law must determine gift tax consequences by looking to the application of the statute and regulations and to the facts and circumstances. The court’s view, then, must be objective.
II.
Nor do I agree with the majority’s determination that the evidence shows immunity from gift tax because the transfer was in the ordinary course of business within Treas.Reg. Section 25.2512-8 (26 C.F.R.). This latter regulation provides in part:
. a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth.
By its very terms the above regulation excludes transfer from the gift tax where the consideration is less than full and adequate. See Commissioner of Internal Revenue v. Berger, supra, at 173. Under this regulation business transfers for less than full and adequate consideration are excluded from the gift tax regardless of a price adjustment clause. See Commissioner of Internal Revenue v. Berger, supra, at 173. If, then, the transfer were a genuine sale in the ordinary course of business, no gift tax is due. And this is true even though the consideration may be adequate. The regulation itself brings this about and the price adjustment clause would be unnecessary.
III.
Moreover, the determination of the majority that this is in the ordinary course of business cannot be upheld because the regulation requires that a transaction be bona fide, at arm’s length, and without donative intent in order to be considered as in the ordinary course of business. The evidence establishes that this transaction rather than being in the ordinary course of business was an intra-family transaction, the main object of which was to transfer some of King’s *714wealth to his children. Such a transfer must be scrutinized with great care. It is presumed to be a gift. Estate of Reynolds v. Commissioner of Internal Revenue, 55 T.C. 172 (1970); Clark v. Commissioner of Internal Revenue, 205 F.2d 353 (2d Cir. 1953), aff’g 18 T.C. 780 (1952). It is difficult to conceive of a transaction being intra-family in character having the purpose of transferring wealth within the family and also having the character of a business transaction. Cf. Robinette v. Helvering, 318 U.S. 184, 63 S.Ct. 540, 87 L.Ed. 700 (1943). This conclusion is supported, to the extent that it is supported, by the fact that the price adjustment clause is included. It would be unnecessary if the transfer were truly one in the ordinary course of business.
It becomes all the more clear, therefore, that the intent was to avoid the gift tax and this court ought not to allow Mr. King to use this clause solely to avoid the tax.
IV.
The clause is not justified by the reason of difficulty of evaluation which is no bar to the imposition of the tax. See Smith v. Shaughnessy, 318 U.S. 176, 63 S.Ct. 545, 87 L.Ed. 690 (1943). And, since the regulations are guides to the valuation of corporate shares, the responsibility for making evaluations for the purpose of determining tax consequences ought not to be shifted to the IRS as the clause apparently seeks to do.
V.
I disagree also with the argument of the majority that giving effect to the price adjustment clause does not conflict with the purposes and the administration of the tax laws. By allowing the taxpayer to make retroactive price adjustment in respect to completed transactions, the court is allowing him to avoid tax consequences and to give effect to this effort would certainly deter the enforcement of the tax. Indeed if it were allowed to stand, and it is doubtful that it will, the effect would be substantial. The majority opinion attempts to distinguish Commissioner of Internal Revenue v. Procter, 142 F.2d 824 (4th Cir.), cert. denied, 323 U.S. 756, 65 S.Ct. 90, 89 L.Ed. 606 (1944), wherein a savings clause which provided that property transferred in trust would revert to the settlor if found subject to gift tax was void as against public policy. The same result was reached in Van Den Wymelenberg v. United States, 397 F.2d 443 (7th Cir.), cert. denied, 393 U.S. 953, 89 S.Ct. 377, 21 L.Ed.2d 364 (1968). The majority opinion says that the cited cases involve changes in the nature of the transaction, whereas the instant clause did not so operate, but the price adjustment clause is intended to work a change in the nature of the transaction in that it attempts to transform what would be a gift into a sale.
It is to be noted that the Supreme Court has held that Internal Revenue provisions are to be interpreted to conform to the basic premise of annual tax accounting. If you give effect to the price adjustment clause you are in effect saying that a private agreement can effect a retroactive change in a completed transaction and its tax consequences. To allow non-business transfers to remain unsettled until the Service makes an adverse determination would render tax liability unsettled at least until the statute of limitations had run. Van Den Wymelenberg v. United States, supra, at 445.
Accordingly, the price adjustment clause is in conflict with the principle that once a transaction and a tax year are completed, the tax consequences attach and retroactive adjustments in the transaction are not allowed to alter these tax consequences.
On its face this transaction is not and cannot be a sale. Surely the law of gift taxation does not call for an entirely different set of definitions and principles. Unless it does, the present holding cannot be sustained.