Farid-Es-Sultaneh v. Commissioner of Internal Rev.
35 A.F.T.R. (P-H) 1049, 160 F.2d 812, 1947 U.S. App. LEXIS 3403 (1947)
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Rule of Law:
For income tax purposes, a transfer of property pursuant to an antenuptial agreement in exchange for the relinquishment of marital rights is a purchase for fair consideration, not a gift. The recipient's cost basis in the property is its fair market value at the time of the transfer.
Facts:
- In December 1923, S. S. Kresge, while married to another woman, delivered 700 shares of stock to the petitioner, Farid-Es-Sultaneh, whom he planned to marry.
- The stated purpose of the transfer was to provide for the petitioner's 'benefit and protection' in the event Kresge died before their marriage.
- After divorcing his wife, Kresge delivered an additional 1800 shares to the petitioner in January 1924 for the same purpose.
- On April 24, 1924, the petitioner and Kresge executed a formal antenuptial agreement.
- In the agreement, in consideration for the shares of stock and Kresge's promise to marry, the petitioner released all dower and other marital rights, including the right to support, that she would acquire in Kresge's substantial property upon their marriage.
- Immediately after signing the agreement, the petitioner and Kresge were married.
- In 1938, the petitioner sold some of the stock, which had appreciated in value since she acquired it.
Procedural Posture:
- The petitioner filed her 1938 income tax return, using the fair market value of the stock on the date of the antenuptial agreement as her cost basis to calculate capital gains.
- The Commissioner of Internal Revenue issued a notice of deficiency, asserting the transfer was a gift and that the petitioner must use the original, lower cost basis of the transferor, S. S. Kresge.
- The petitioner challenged the deficiency in the Tax Court of the United States (the trial court for tax matters).
- The Tax Court held in favor of the Commissioner, finding that the transfer was a gift.
- The petitioner (as appellant) appealed the Tax Court's decision to the United States Court of Appeals for the Second Circuit.
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Issue:
Does a taxpayer's transfer of stock to her fiancé pursuant to an antenuptial agreement, in which she relinquishes all marital rights, constitute a 'gift' under the income tax law, thereby requiring her to use the transferor's cost basis when calculating capital gains upon a later sale?
Opinions:
Majority - Chase, J.
No. The transfer of stock pursuant to the antenuptial agreement was not a gift for income tax purposes but rather a purchase for fair consideration. The court reasoned that income tax provisions are not in pari materia with estate and gift tax statutes, which have special definitions of consideration. The petitioner's relinquishment of her valuable inchoate marital rights, such as dower and support, in Kresge's large estate constituted fair consideration under ordinary legal concepts. This exchange precluded the existence of the donative intent necessary for a gift under income tax law. Therefore, the petitioner took the shares as a purchaser, and her basis for calculating capital gains is the fair market value of the stock at the time she acquired it, not Kresge's much lower original basis.
Dissenting - Clark, J.
Yes. The transfer of stock should be treated as a gift, and the petitioner should be required to use the transferor's basis. The dissent argued that the definition of 'gift' should be consistent across the Revenue Code to prevent tax avoidance through transfers within an intimate group. Furthermore, the facts did not support a finding of a purchase. Kresge transferred the stock to the petitioner months before their marriage, at a time when she had no dower or other rights to relinquish in his property. The explicit purpose was to protect her if he died before marriage, an event that would prevent her from ever acquiring marital rights. The parties' own antenuptial agreement referred to the transfer as a 'gift,' which reflects its true nature.
Analysis:
This decision established a significant divergence between the definition of 'gift' for income tax purposes versus estate and gift tax purposes. By holding that the relinquishment of marital rights constitutes fair consideration for a property transfer, the court classified such transfers as purchases, not gifts. This allows the recipient to take a 'stepped-up' basis in the property, equal to its fair market value at the time of transfer, thereby reducing their future capital gains tax liability. The case highlights that different tax statutes, though related, are not always construed 'in pari materia' and can lead to different tax treatments for the same transaction.
