## Facts

- Susie Salvatore inherited sole ownership of a gas-station property in Greenwich, Connecticut, from her husband in 1948.
- In 1963, Texaco offered to purchase the property for $295,000.
- On July 24, 1963, Salvatore executed a written agreement to sell the property to Texaco.
- After the sale agreement was signed, Salvatore and her children agreed on a family allocation of the sale proceeds: debts would be paid; Salvatore would receive about $100,000 for her support; the balance would be divided among the five children.
- On August 28, 1963, Salvatore deeded an undivided one-half interest in the property to her five children without consideration (each received a one-tenth interest).
- In early September 1963, Salvatore and the children executed deeds transferring the property to Texaco; the intra-family deed and the deeds to Texaco were recorded simultaneously.
- Salvatore reported on her 1963 return that she gifted fractional interests to the children and reported gain only on one-half of the sale; the children each reported gain on their claimed shares.
- The Commissioner determined a deficiency, asserting Salvatore was taxable on the entire gain because she was the sole seller for federal income tax purposes.

## Issues

1. Whether Salvatore was taxable on all of the gain from the 1963 sale of the property, or only on the portion corresponding to the interest she retained after deeding a one-half interest to her children.
2. Whether the post-contract transfer to the children should be respected for income tax purposes as making the children co-sellers, or disregarded as a conduit arrangement under substance-over-form and assignment-of-income principles.
3. On appeal, whether the Tax Court clearly erred in finding that Salvatore, not the children, was the true seller.

## Decision

- The Tax Court held Salvatore was taxable on all gain from the sale.
- The Tax Court treated the children’s brief record ownership as a conduit device that did not change the identity of the seller once the sale terms were fixed.
- The Second Circuit affirmed, holding the Tax Court’s finding that Salvatore was the sole owner and seller was not clearly erroneous.

## Legal Principles

- Federal income tax liability follows the substance of a transaction rather than formal title transfers designed to reallocate gain.
- A taxpayer who has effectively committed property to sale cannot avoid tax on the resulting gain by transferring title to others after the sale has become fixed and certain.
- A sale by one person cannot be converted into a sale by another for tax purposes by interposing the other as a conduit through which title passes.
- The determination of the “true seller” is fact-intensive and may be upheld on appeal unless clearly erroneous.

## Conclusion

Because Salvatore executed the binding sale agreement before transferring an interest to her children and the children’s role functioned primarily to pass title and receive proceeds under a family allocation, she remained the seller for income tax purposes and was taxable on the entire gain from the Texaco sale.


Salvatore v. Comm’r, 434 F.2d 600 (2d Cir. 1970)