Thank You For Submiting Feedback!
The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.
An apartment house, which was the sole asset of the respondent corporation, was transferred in the form of a liquidating dividend to the corporation's two shareholders. They in turn formally conveyed it to a purchaser who had originally negotiated for the purchase from the corporation. Petitioner, the Commissioner of Internal Revenue, assessed an income tax deficiency against respondent corporate taxpayer. The tax court held that the respondent was taxable under § 22 of the Internal Revenue Code for the gain which accrued from the sale. The United States Court of Appeals for the Fifth Circuit reversed the tax court’s decision. Petitioner sought review of the decision.
Was the respondent corporation was taxable under § 22 of the Internal Revenue Code for the gain which accrued from the sale?
The United States Supreme Court reversed the appellate court, holding that the sale of respondent's land was actually a sale of the corporation for income tax purposes as petitioner had claimed. Thus, the gain that accrued from the sale was taxable to respondent. Because evidence supported the tax court findings that the whole transaction showed a sale by respondent rather than by the shareholders, the reviewing courts had to accept them. The true nature of the transaction could not be disguised by mere formalisms.