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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.
Petitioner Susie Salvatore had inherited a gas station from her husband upon his death. Petitioner later contracted to sell the station to Texaco, Inc., an oil company; however, petitioner gave a one-half interest in the property to her children before completing the sale. After paying off the liens on the property, petitioner received one-half of the profit from the sale and the children split the rest. Petitioner reported a capital gain on her half of the profit and gifts made to each of her children. The Commissioner determined that the entire amount from the sale was taxable to petitioner as long-term capital gain. Petitioner sought review.
Was the entire amount from the sale taxable to the petitioner as long-term capital gain?
The court ruled in favor of the commissioner, holding that in the context of the tax consequences from the sale of property, the form of a transaction cannot be permitted to prevail over its substance. In the case at bar, although the children obviously had expected to receive a share of the property, they held no property interest in it when the taxpayer contracted to sell it to the company. The petitioner’s subsequent conveyance, unsupported by consideration, was merely an intermediate step in the transfer of legal title from the taxpayer to the company and whether the gift was completed prior to sale was immaterial.