## Facts

- In 1955, Preston Lea Spruance and Margaret Halsey Spruance executed a separation agreement requiring Spruance to transfer appreciated stock (about $1,000,000 in value) to an irrevocable trust.
- The trust provided income for Margaret’s support and for the support of the minor children during minority; the remainder interest was to pass to the children after the death of the surviving former spouse.
- A divorce decree approved and incorporated the separation agreement, and the arrangement was carried out.
- Spruance did not report gain on the 1955 transfer and did not file a federal gift tax return for 1955; the limitations period later expired on any income tax for 1955 arising from the transfer itself.
- Delaware courts later confirmed that the trust had been created under the separation agreement.
- In 1962, 1964, and 1965, the trust (through Spruance as trustee) received General Motors divestiture stock distributions and reported results using a fully stepped-up basis under I.R.C. § 111 (1954 Code).
- The Commissioner determined: (i) a 1955 gift tax deficiency (asserting part of the transfer was a gratuitous remainder transfer to the children), (ii) a § 6651(a) addition to tax for failure to file a 1955 gift tax return, and (iii) trust income tax deficiencies for 1962, 1964, and 1965 based on basis/gain treatment; the Commissioner also raised equitable estoppel against the trustee and disputed whether 1962 was time-barred.

## Issues

1. Whether Spruance’s 1955 transfer of appreciated stock to the trust constituted a taxable gift, and to what extent, given the asserted support and settlement obligations.
2. Whether Spruance was liable for an addition to tax under I.R.C. § 6651(a) for failing to file a 1955 federal gift tax return.
3. Whether the trust realized long-term capital gain under I.R.C. § 111 in 1962, 1964, and 1965 upon receiving GM divestiture stock, and what basis applied.
4. Whether equitable estoppel barred the trustee from claiming a stepped-up basis based on Spruance’s individual conduct in 1955.
5. Whether assessment and collection of any trust income tax deficiency for 1962 was barred by the statute of limitations.

## Decision

- The court held that Spruance made a taxable gift in 1955 to the extent the stock transfer exceeded amounts attributable to enforceable support and maintenance obligations and instead constituted a gratuitous transfer of a remainder interest to the children.
- The court held Spruance was not liable for the § 6651(a) addition to tax for failure to file a 1955 gift tax return because the failure was due to reasonable cause and not willful neglect.
- The court held the trustee was not equitably estopped from claiming the stepped-up basis; conduct in an individual capacity could not estop Spruance in his representative capacity as trustee.
- Accepting the Commissioner’s litigation concession consistent with an existing revenue ruling, the court held the trust’s basis was increased such that no gain was realized under § 111 on the GM divestiture stock receipts.
- Because no gain was realized in 1962, there was no substantial omission of income; therefore, assessment of any 1962 deficiency was barred by the statute of limitations.

## Legal Principles

- Transfers pursuant to a separation or divorce property settlement are subject to gift tax to the extent they are not supported by full and adequate consideration in money or money’s worth; amounts exceeding legally enforceable support obligations may be treated as taxable gifts.
- I.R.C. § 6651(a) does not apply if the taxpayer proves failure to file was due to reasonable cause and not due to willful neglect.
- Equitable estoppel generally cannot be applied against a fiduciary based solely on the fiduciary’s conduct in a different, individual capacity; representative and individual capacities are treated as legally distinct for this purpose.
- Correct basis and gain recognition govern income tax consequences; where basis is increased as required (including by the Commissioner’s concession consistent with administrative guidance), no gain is recognized under § 111.
- The extended limitations period for substantial omissions does not apply absent an omission; if no gain is properly includible, the ordinary limitations period can bar assessment.

## Conclusion

The Tax Court treated part of Spruance’s divorce-settlement trust funding as a taxable gift to the children, excused the failure-to-file penalty for reasonable cause, rejected estoppel against the trustee based on Spruance’s individual actions, and—after a basis concession—found no § 111 gain, which also meant the 1962 income tax assessment was time-barred.


Spruance v. Commissioner, 60 T.C. 141 (1973)