## Facts

- Frank D. Stranahan, a cash-basis taxpayer, entered a closing agreement with the IRS and paid $754,815.72 of interest in 1964, creating a large interest deduction that his ordinary 1964 income would not have fully absorbed.
- Stranahan and his son, Duane, were employees and shareholders of Champion Spark Plug Company.
- On December 22, 1964, Stranahan executed an agreement assigning to Duane the right to receive up to $122,820 of future dividends on Stranahan’s Champion common stock (12,500 shares).
- Duane paid Stranahan $115,000 by check on December 22, 1964 as consideration for the assigned dividend rights.
- Stranahan directed Champion’s transfer agent to send dividend checks to Duane until Duane received an aggregate $122,820.
- Stranahan reported the $115,000 received in 1964 as ordinary income, enabling him to use the interest deduction.
- In 1965 (through Stranahan’s death on November 10, 1965), Champion paid $40,050 in dividends to Duane under the assignment.
- The estate did not report the $40,050 as income for the 1965 period; Duane reported the dividends on his own return, treating the $115,000 payment as his basis.
- The IRS issued a deficiency notice asserting the 1965 dividends paid to Duane were taxable to Stranahan (and thus his estate), contending the 1964 transaction was effectively a loan or an anticipatory assignment of income.
- The Tax Court agreed with the IRS and treated the transaction as a loan; the estate appealed.

## Issues

1. Whether Stranahan’s 1964 transfer of the right to receive a specified amount of future dividends to his son for cash was a bona fide sale, or a disguised loan/anticipatory assignment that left the 1965 dividends taxable to Stranahan.
2. Whether the assignment-of-income doctrine required inclusion of the 1965 dividends in Stranahan’s gross income because he retained the underlying stock.

## Decision

- The Sixth Circuit reversed the Tax Court.
- The court held the 1964 transaction was a valid sale of the right to receive a specified amount of future dividends for substantial consideration.
- The court concluded Stranahan was completely divested of any interest in the assigned dividends, and Duane acquired an enforceable right independent of his father.
- The court held the 1965 dividends paid to Duane under the agreement were not includible in Stranahan’s income and were taxable to Duane.

## Legal Principles

- A taxpayer generally cannot avoid tax by assigning income from income-producing property while retaining the property; mere redirection of payments does not shift tax liability.
- A bona fide sale of an income right for adequate consideration can shift tax liability on the sold income to the purchaser when the seller is actually divested of the transferred income interest.
- Economic substance is shown where the purchaser pays substantial present-value consideration and bears real risk that the expected income stream may be less than projected or delayed.
- A tax-planning motive, without more, does not invalidate a transaction that has legal effect, adequate consideration, and real economic consequences.

## Conclusion

The Sixth Circuit treated the father-to-son transfer of specified dividend rights for cash as a genuine sale rather than a loan or ineffective anticipatory assignment, so dividends paid under the transfer were taxable to the son, not to the decedent’s estate.


Estate of Stranahan v. Commissioner, 472 F.2d 867 (6th Cir. 1973)