## Facts

- Gino A. Speca and Joseph F. Madrigrano were officer-directors of Triangle Wholesale Company, Inc., a Wisconsin beer distributor taxed as a Subchapter S corporation.
- Triangle’s income passed through to shareholders for reporting on individual returns.
- On March 31, 1971, Speca and Madrigrano transferred their remaining Triangle stock to their children in transactions structured as sales for non-interest-bearing promissory notes payable one year later.
- Madrigrano transferred 376 shares to his sons (ages 23 and 21), each signing a note for $7,110.97; both sons were full-time students and worked part-time for Triangle.
- Speca transferred all his remaining shares to his sons (ages 10 and 7), who were likewise expected to provide $7,110.97 notes as consideration.
- Repayment was expected to come primarily from dividends or distributions attributable to the transferred stock.
- After the transfers, the children were treated as shareholders and reported portions of Triangle’s 1971 income on their returns.
- The Commissioner reallocated the 1971 pass-through income to the parents, asserting the transfers lacked economic substance and functioned as assignments of income.
- The Tax Court found deficiencies for 1971, concluding the transfers lacked “sufficient economic reality” to shift taxation to the children.

## Issues

1. Whether the Tax Court erred in finding that the parents’ intrafamily transfers of S-corporation stock to their children lacked sufficient economic reality, such that 1971 income from the stock remained taxable to the parents.

## Decision

- The Seventh Circuit affirmed the Tax Court’s deficiency determinations for 1971.
- The court upheld the finding that the stock transfers lacked sufficient economic reality to shift the incidence of taxation from the parents to the children.
- The court treated the “economic reality” determination as factual and upheld it under a clearly erroneous standard.
- The court relied on indicia of non-substantive transfers, including non-interest-bearing notes, repayment tied to the stock’s own income, and the children’s limited independent ability to pay (especially the minors).
- The court noted the parents’ continued managerial control and salary-based benefits, supporting the conclusion that there was no meaningful shift in economic burdens and benefits.

## Legal Principles

- For federal income tax purposes, intrafamily transfers of income-producing property are respected only if they reflect a genuine shift in economic benefits and burdens, not merely a formal reallocation of income.
- Transactions cast as sales may be disregarded when consideration consists of non-interest-bearing promissory notes effectively payable only from the transferred property’s future income.
- The assignment-of-income doctrine and substance-over-form analysis permit taxing income to the person who, in substance, retains control over the property and the production or disposition of its income.
- Whether a transaction has sufficient economic substance is a fact-intensive inquiry; appellate review is deferential to the Tax Court’s factual findings unless clearly erroneous.

## Conclusion

The court upheld the Tax Court’s determination that the parents’ purported sales of S-corporation stock to their children were not economically real transactions; therefore, the 1971 pass-through income attributable to that stock was taxable to the parents rather than the children.


Speca v. Commissioner, 630 F.2d 554 (7th Cir. 1980)