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Keywords

corporation

Related Cases

Behrend v. U.S., Not Reported in F.2d, 1972 WL 2627, 31 A.F.T.R.2d 73-406, 73-1 USTC P 9123

Facts

Maxwell and Alvin Behrend, brothers and shareholders of Behrend Brothers, Inc., donated preferred stock to their charitable foundation, Behrend Foundation, Inc. The corporation later redeemed this stock, leading the IRS to classify half of the redemption payments as taxable dividend income to the Behrends. The brothers argued that the donations were completed gifts and that the redemptions were separate transactions.

The facts were agreed. Taxpayer's corporation, organized under the laws of Maryland on January 2, 1946 with the name of Behrend Brothers, Inc., was an automobile dealership, in Baltimore, continuously from its formation until August 7, 1965.

Issue

Did the taxpayers realize dividend income when the corporation redeemed preferred stock that had been donated to a charitable foundation?

The Government contends that, in truth, the payments by the corporation in the redemption constituted a dividend to the taxpayers—that it was the same as if the corporation had paid this money to these stockholders and they had in turn paid it to the foundation.

Rule

The court applied the principle that a completed gift of appreciated property does not result in income to the donor if the donor parts with title before the property generates income.

The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of sale.

Analysis

The court found that the redemption payments were not dividends taxable to the Behrends, as the gifts were perfected before the corporation redeemed the stock. The court noted that there was no binding obligation on the parties to complete any of the steps involved in the transactions, and the taxpayers did not benefit from the foundation's charitable activities.

However, this factor did not convert into a constructive dividend the proceeds of the redemptions. Nor was the validity of the gifts impugned by the common identity of the donors and the foundation and the corporation.

Conclusion

The court affirmed the District Court's judgment, concluding that the redemption payments were not taxable dividends.

We think the determination of the District Court was correct.

Who won?

The Behrends prevailed in the case because the court determined that the redemption payments were valid gifts and not taxable income.

In our judgment the redemption payments of the corporation to the foundation were not dividends taxable to the Behrends.

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Keywords

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Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 62 S.Ct. 540, 86 L.Ed. 775, 42-1 USTC P 9245, 28 A.F.T.R. 567, 1942-1 C.B. 214

Romy Hammes, Inc. v. Commissioner of Internal Revenue, 68 T.C. 900

Rockefeller v. U.S., 257 U.S. 176, 42 S.Ct. 68, 66 L.Ed. 186, 1 USTC P 55, 3 A.F.T.R. 3128

Alderman v. Commissioner of Internal Revenue, 55 T.C. 662

Chertkof v. Commissioner of Internal Revenue, 72 T.C. 1113