Salvatore v. Commissioner
29 T.C.M. 89, 1970 T.C. Memo. 30, 1970 Tax Ct. Memo LEXIS 331 (1970)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A taxpayer who has executed a binding contract to sell property cannot avoid being taxed on the entire capital gain by subsequently gifting a partial interest in the property to another party before the closing of the sale.
Facts:
- Susie Salvatore inherited a service station property from her husband upon his death in 1948.
- Salvatore's children operated the station, and from its income, she received $100 per week for her support.
- In early 1963, after receiving a purchase offer from Texaco, Inc., Salvatore and her children decided to sell the property.
- On July 24, 1963, Susie Salvatore, as the sole owner, executed a formal agreement to sell the property to Texaco for $295,000.
- After the sales agreement was signed, the family decided that Salvatore would receive $100,000 from the proceeds and the balance would be divided among her five children.
- To effectuate this plan, on August 28, 1963, Salvatore executed a warranty deed conveying an undivided one-half interest in the property to her five children.
- Shortly thereafter, by deeds dated August 28 and August 30, 1963, Salvatore and her children jointly conveyed their interests in the property to Texaco to complete the sale.
Procedural Posture:
- Susie Salvatore filed her 1963 individual federal income tax return, reporting gain on only one-half of the proceeds from the property sale.
- Salvatore's five children each filed tax returns reporting their proportionate shares of the other half of the gain.
- The Commissioner of Internal Revenue issued a notice of deficiency to Salvatore, determining that the entire gain from the sale was taxable to her.
- Salvatore petitioned the United States Tax Court for a redetermination of the tax deficiency.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a property owner who contracts to sell real estate, and subsequently gifts a partial interest in that property to others before the sale is finalized, remain taxable on the entire gain from the sale under the anticipatory assignment of income doctrine?
Opinions:
Majority - Featherston
Yes. A property owner who contracts to sell property remains taxable on the entire gain, as the subsequent gift of a partial interest constitutes an anticipatory assignment of income. The court must look to the substance of the transaction rather than its form. Citing Commissioner v. Court Holding Co., the court reasoned that a sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a mere conduit through which to pass title. Salvatore became entitled to the proceeds of the sale when she executed the binding sales contract with Texaco. Her subsequent transfer of a one-half interest to her children was merely an anticipatory assignment of one-half of the income from that sale, making her taxable on the entire gain.
Analysis:
This case is a classic application of the 'substance over form' doctrine and the principle of anticipatory assignment of income. It establishes that the right to income from a property sale is effectively realized for tax purposes when a binding contract is executed, not at the final closing. The decision prevents taxpayers from shifting tax liability to others, often family members in lower tax brackets, through last-minute gifts of property after the economic reality of the sale has been fixed. This precedent solidifies the principle that the individual who controls and is entitled to the income when it is 'earned' is the one who must pay the tax on it.
