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Farid-Es-Sultaneh v. Commissioner - 160 F.2d 812 (2d Cir. 1947)


Estate and gift tax statutes are in pari materia and are to be so construed.


In 1923, petitioner Farid-Es-Sultaneh, an unmarried American woman, executed a pre-nuptial agreement with her fiance, Sebastian Kresge, the owner of the S.S. Kresge Company. The pre-nuptial agreement stipulated that petitioner was to receive a certain amount of shares in the company that was to be an ante-nuptial settlement in the event the parties divorced. Farid-Es-Sultaneh released all dower and other marital rights, including the right to her support. They were married in New York immediately after the ante-nuptial agreement was executed and continued to be husband and wife until the petitioner obtained a final decree of absolute divorce from him in 1928. No alimony was claimed by, or awarded to, her. The Tax Commissioner determined that stocks petitioner obtained pursuant to a pre-nuptial agreement were taxable for capital gains. The Tax Court upheld that decision. Petitioner sought review. 


Did the Commissioner err when it directed that a divorced taxpayer must use the adjusted cost basis to determine the taxable gain since the Internal Revenue Service concluded that the transfer of stock was a gift?




The United States Court of Appeals for the Second Circuit reversed the capital gains tax assessment against Farid-Es-Sultaneh, concluding that Farid-Es-Sultaneh gave fair consideration in relinquishing her marital rights, for the stock she received. Income tax provisions were not to be construed in pari materia with either the estate or gift tax statutes. Although the transfers of the stock made both in December 1923, and in the following January by Sebastian Kresge to Farid-Es-Sultaneh were called a gift in the ante-nuptial agreement later executed and were to be for the protection of his prospective bride if he died before the marriage was consummated, the "gift" was contingent upon his death before such marriage, an event that did not occur. Consequently, it would appear that no absolute gift was made before the ante-nuptial contract was executed and that Farid-Es-Sultaneh took title to the stock under its terms, viz: in consideration for her promise to marry him coupled with her promise to relinquish all rights in and to his property to which she would otherwise acquire by the marriage. Her inchoate interest in the property of her affianced husband greatly exceeded the value of the stock transferred to her. It was a fair consideration under ordinary legal concepts of that term for the transfers of the stock by him.  Farid-Es-Sultaneh performed the contract under the terms of which the stock was transferred to her and held the shares not as a donee but as a purchaser for a fair consideration.

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