Court Opinion

ID: 768971
Source: CourtListenerOpinion
Date Created: 2012-04-18 09:18:26+00
Date Added: 2024-06-11T17:55:39.733679
License: Public Domain

214 F.3d 846 (7th Cir. 2000)
LAVONNA J. STINSON ESTATE,    Plaintiff-Appellant,v.UNITED STATES OF AMERICA,    Defendant-Appellee.
No. 99-3333
In the  United States Court of Appeals  For the Seventh Circuit
ARGUED April 5, 2000
DECIDED May 26, 2000

Appeal from the United States District Court  for the Northern District of Indiana, South Bend  Division.  No. 3:97CV0455RM--Robert L. Miller, Jr., Judge.
Before MANION, KANNE, and EVANS, Circuit  Judges.
EVANS, Circuit Judge.

1
Lavonna Stinson  owned valuable farmland in Fulton County,  Indiana. In June 1981 she and her five  children and two grandchildren  incorporated as Stinsons, Inc. Ms.  Stinson then sold 267 acres of farmland  to the corporation for $398,728 to be  paid in monthly payments of $2,856.62  over 20 years. The children and  grandchildren exchanged their interest in  160 acres of farmland for 600 shares of  Stinsons' stock--100 to each child and 50  to each grandchild. The board of  directors consisted of all seven  shareholders and Ms. Stinson, who never  was a shareholder but became president  and chairman of the board.

2
Under the corporation's bylaws,  corporate property could be sold only if  the sale was approved by the holders of  at least 67 percent of the outstanding  stock and by at least two-thirds of the  members of the board of directors. Under  the law of Indiana governing business  corporations, because the articles of  incorporation did not address the  corporation's authority to declare  dividends, Stinsons could declare them  only with the consent of a majority of  board members. See Indiana Code sec.sec.  23-1-28-1.

3
From 1982 until 1985 Ms. Stinson forgave  $147,000 in principal indebtedness on the  sale of the land to the corporation  ($30,000 in 1982; $50,000 in 1983;  $25,000 in 1984; and $42,000 in 1985).  Stinsons, Inc. sold the farmland at  various sales during 1990 and converted  the assets to cash; the corporation  dissolved in August 1990.

4
After Ms. Stinson died, the IRS audited  her estate and determined that the  forgiveness of indebtedness did not  qualify for the $10,000 per donee  exclusion from the gift tax, which the  Estate had claimed, because it was not a  gift of a present interest. The Estate  filed a protest with the IRS and lost. It  then paid the deficiency and filed a  claim for refund, which the IRS also  denied. This case followed. The district  court considered cross-motions for  partial summary judgment and upheld the  IRS' position. The Estate appeals, and we  now review the issue de novo. Pipitone v.  United States, 180 F.3d 859 (7th Cir.  1999).

5
The Internal Revenue Code imposes a tax  on the transfer of property by gift, 26  U.S.C. sec. 2501(a). Section 2511(a) says  that the tax applies whether the transfer  is direct or indirect and whether the  property is tangible or intangible. A  transfer by gift from an individual to a  corporation is an indirect gift from the  individual to the corporation's  shareholders for gift tax purposes. 26  C.F.R. sec. 25.2511-1(h)(1). The  forgiving of a debt constitutes a  transfer of property. 26 C.F.R. sec.  25.2511-1(a). Under sec. 2503(b) a donor  does not pay gift tax on the first  $10,000 of gifts, "other than gifts of  future interests in property," made to  any person during the calendar year. A  "future interest" is a     legal term, and includes reversions,  remainders, and other interests or  estates, whether vested or contingent,  and whether or not supported by a  particular interest or estate, which are  limited to commence in use, possession,  or enjoyment at some future date or time.    Treas. Reg. sec. 25.2503-3. The  regulation also provides that a present  interest in property is "[a]n  unrestricted right to the immediate use,  possession, or enjoyment of property or  the income from property (such as a life  estate or term certain)." The first issue  before us is whether the forgiveness of  indebtedness here is a gift of a present  interest subject to the exclusion.

6
The Estate argues, of course, that the  gift is subject to the exclusion:  the  gift resulted in a balance sheet improve  ment; the net worth of Stinsons, Inc. was  increased by the amount of the debt  reduction and the gift resulted in an  increase to the shareholders in their  stock value. The IRS sees it differently.  It says that while a gift to the  corporation is an indirect gift to the  shareholders, the shareholders have  received a gift of a future, not a  present, interest. They can obtain the  use or enjoyment of the property only  through the liquidation of the  corporation or the declaration of a  dividend. The shareholders do not have  present individual control over the  property. For that reason, the IRS  contends that the $10,000 exclusion per  donee does not apply.

7
The precise issue is one of first  impression in our circuit. We approach  the issue keeping in mind that Internal  Revenue Code provisions dealing with  deductions, exemptions, and exclusions  are matters of legislative grace.  Templeton v. Commissioner, 719 F.2d 1408  (7th Cir. 1983). The exclusion must be  narrowly construed, and the Estate has  the burden of showing that the gift is  not in fact a gift of a future interest.  Commissioner v. Disston, 325 U.S. 442  (1945). A look at the issue through the  prism of the statute and the Treasury  regulations leads us to the conclusion  that the gift in this instance is an  indirect gift to the shareholders of a  future interest; therefore, it does not  qualify for the exclusion.

8
Treasury Regulation sec. 25.2503-3  provides that the exclusion applies only  to gifts of present interests which, as  we just observed, involve an  "unrestricted right to the immediate use,  possession, or enjoyment" of the  property. The gift in this case involved  postponement of enjoyment. It is true  that the gift may have increased the  value of the corporation or the value of  the stock. However, the shareholders  could not individually realize the  increase without liquidating the  corporation or declaring a dividend.  Neither of those acts could occur upon  the actions of any individual. As we have  said, corporate property could be sold  only with the approval of the holders of  67 percent of the stock and by two-thirds  of the members of the board of directors.  Dividends could be declared only with the  consent of a majority of board members.  The gift of forgiveness here was a gift  of a future interest.

9
Our conclusion is consistent with  Ryerson v. United States, 312 U.S. 405  (1941), United States v. Pelzer, 312 U.S.  399 (1941), and Helvering v. Hutchings,  312 U.S. 393 (1941), a trio of cases  involving the gift tax as it relates to  gifts made to trusts. The Court  established that the gift to a trust is,  in fact, a gift to the beneficiaries.  Then, in Pelzer and Ryerson, it faced the  question of whether the gifts were of  present interests and thus subject to the  exclusion. Relying in part on Treasury  regulations and determining that their  promulgation was within the competence of  the Treasury, the Court determined that  because the beneficiaries had no right to  the present enjoyment of the gifts, they  were not gifts of present interests. Or,  as we have said in a case involving a  trust, the "sole statutory  distinction between present and future  interests lies in the question of whether  there is postponement of enjoyment of  specific rights, powers or privileges  which would be forthwith existent if the  interest were present." Howe v. United  States, 142 F.2d 310, 312 (7th Cir.  1944), quoting Commissioner v. Glos  (Gloss), 123 F.2d 548 (7th Cir. 1941). We  think the analysis applies as well to  gifts to a corporation.

10
Other courts have arrived at just that  conclusion. Heringer v. Commissioner, 235  F.2d 149 (9th Cir. 1956), involved a  transfer of stock to a family  corporation, shares in which were held by  two sets of partners and their children.  The court skipped the question as to  whether gifts which were made were in  fact gifts to children/shareholders,  rather than a gift to the corporation. By  analogy to Ryerson and Hutchings, the  court said it did not matter because in  any case the gifts were of future  interests and therefore did not entitle  the donors to the exclusions. A  postponement of the enjoyment of the  property or a condition attached to the  possession of the property makes the gift  a gift of a future interest.

11
The court in Chanin v. United States,  393 F.2d 972 (Ct. Cl. 1968), also found  that a gift to a corporation, though it  was, in fact, a gift to the shareholders,  was a gift of a future interest. The  donees did not have an immediate right to  use the property in the absence of  liquidation or some joint action of a  majority of the shareholders. In Georgia  Ketteman Trust v. Commissioner, 86 T.C.  91 (1986), the court rejected arguments  made in the present case that the donees  comprised the entire membership of the  board of directors and thus could have  authorized a corporate dividend or  liquidation of the corporation. The gift  was nonetheless found to be a gift of a  future interest. As the Court of Appeals  for the Eighth Circuit has explained:    Unless the donee is entitled  unconditionally to the present use,  possession, or enjoyment of the property  transferred, the gift is one of a future  interest for which no exclusion is  allowable under the statute.    French v. Commissioner, 138 F.2d 254  (1943).

12
The other issue raised in this case  involves the value of the gift:  Is it  the increase in the value of the shares  each person held or the value to the  donor of the amount of the loan forgiven?  The answer given by the Treasury  regulations is that the gift tax is "an  excise upon [the donor's] act of making  the transfer [and] is measured by the  value of the property passing from the  donor . . . ." Treas. Reg. sec. 25.2511-  (2)(a); Robinette v. Helvering, 318 U.S.  184 (1943); Citizens Bank & Trust Co. v.  Commissioner, 839 F.2d 1249 (7th Cir.  1988). Here the value of the taxable gift  was the $147,000 forgiveness of the debt.  The fact that there would be other ways  of valuing the gift from the point of  view of the donees is not controlling.

13
The judgment of the district court is  AFFIRMED.