Stinson Estate, L. v. United States ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 99-3333
LAVONNA J. STINSON ESTATE,
Plaintiff-Appellant,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Indiana, South Bend
Division.
No. 3:97CV0455RM--Robert L. Miller, Jr., Judge.
ARGUED April 5, 2000--DECIDED May 26, 2000
Before MANION, KANNE, and EVANS, Circuit
Judges.
EVANS, Circuit Judge. 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.
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.
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.
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).
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.
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.
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.
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.
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
distinctionbetween 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.
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.
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).
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.
The judgment of the district court is
AFFIRMED.