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Law School Case Brief

Diedrich v. Commissioner - 457 U.S. 191, 102 S. Ct. 2414 (1982)

Rule:

A donor who makes a gift of property on condition that the donee pay the resulting gift taxes realizes taxable income to the extent that the gift taxes paid by the donee exceed the donor's adjusted basis in the property.

Facts:

In two separate cases, individual taxpayers made a gift of property on condition that the donee pay the resulting gift tax. In both cases the Commissioner of Internal Revenue determined, after an audit, that the taxpayers had realized taxable income to the extent that the gift tax paid by the donee exceeds the taxpayer's adjusted basis in the property transferred. The taxpayers filed petitions in the United States Tax Court for redetermination of deficiencies. The Tax Court held for the taxpayers, concluding that no income had been realized. The United States Court of Appeals for the Eighth Circuit consolidated the two appeals and reversed, concluding that to the extent the gift taxes paid by the donees exceeded the donors' adjusted bases in the property transferred, the donors realized taxable income.

The Supreme Court of the United States granted certiorari to resolve a Circuit conflict as to whether a donor who makes a gift of property on condition that the donee pay the resulting gift tax receives taxable income to the extent that the gift tax paid by the donee exceeds the donor's adjusted basis in the property transferred.

Issue:

Did a donor making gift of property on condition that donee pay resulting gift tax, realize a taxable income to extent that gift tax paid by donee exceeds donor's adjusted basis in property?

Answer:

Yes

Conclusion:

The Supreme Court of the United States affirmed because the form and the intent of the gifts did not matter. The fact the gifts were conditional did not change the benefit to petitioners. The "reality," not the form, of the transactions governed. An examination of the donor's intent did not change the character of the benefit. The fact that the gift tax obligation was discharged by way of a conditional gift rather than from funds derived from a pregift sale did not alter the underlying benefit to petitioners. A donor who made a gift of property on condition that the donee pay the resulting gift taxes realized taxable income to the extent that the gift taxes paid by the donee exceeded the donor's adjusted basis in the property.

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