## Facts

- Susie Salvatore inherited a gas and service station property in Greenwich, Connecticut, from her husband, who died in 1948 and left his estate to her outright.
- After her husband’s death, Salvatore’s children continued to operate the station; they paid her amounts for support, including a weekly payment geared to her needs.
- By 1963, the property had appreciated, and Texaco expressed interest in purchasing it.
- Salvatore and her children discussed the proposed sale and agreed on an internal family division of the sale profits: Salvatore would receive one-half, and her five children would split the other half equally.
- The negotiations with Texaco were handled for the family (including by a son), but Salvatore remained the owner of record when the transaction was finalized.
- On July 24, 1963, Salvatore alone executed a written purchase-and-sale agreement with Texaco for the station property.
- After the sale terms were set and the agreement with Texaco had been signed, Salvatore executed a warranty deed (dated August 28, 1963) conveying an undivided one-half interest in the property to her five children (i.e., a one-tenth interest to each child).
- Immediately thereafter, Salvatore and her children executed deeds conveying their respective interests to Texaco; the conveyance documents were recorded at the same time on September 6, 1963.
- On their 1963 income tax returns, Salvatore reported only one-half of the capital gain from the sale, and each child reported a share of the remaining gain.
- Salvatore also filed a federal gift tax return for 1963 reporting gifts of the one-tenth interests to each child.
- The Commissioner of Internal Revenue determined an income tax deficiency for 1963 on the ground that Salvatore was taxable on the entire gain because she, in substance, was the seller and the children’s brief ownership did not shift who realized the gain.

## Issues

1. Whether a taxpayer who executed a binding agreement to sell appreciated real property may shift part of the resulting capital gain to her children by deeding them a fractional interest shortly before the closing, when the children then immediately join in conveying title to the buyer.

## Decision

- The Tax Court held that Salvatore was taxable on all of the gain realized on the 1963 sale of the property.
- The court treated the children as conduits through whom title passed, rather than as independent sellers who realized gain on their own behalf.
- The Tax Court sustained the Commissioner’s deficiency determination.
- The Second Circuit later affirmed the Tax Court’s decision.

## Legal Principles

- Federal income tax liability turns on the substance of a transaction, not merely on the sequence of formal title transfers.
- A taxpayer cannot avoid tax on gain from a sale by transferring property after the sale has been effectively fixed by a binding contract, where the transferees’ role is limited to passing title and receiving a prearranged portion of the proceeds.
- When a transfer is made without consideration and closely tied to an already arranged sale, the transfer may be treated as an anticipatory assignment of income, leaving the gain taxable to the party who, in substance, sold the property.
- Filing a gift tax return and describing the inter-family conveyance as a gift may support viewing the transfer as a gratuitous division of sale proceeds rather than a shift in the identity of the seller for income tax purposes.

## Conclusion

Because Salvatore signed the sale agreement with Texaco before deeding a one-half interest to her children, and the children’s ownership was brief and tied to the immediate conveyance to Texaco, the court treated the children as mere conduits and taxed Salvatore on the entire gain from the sale.


Susie Salvatore v. Commissioner, 29 T.C.M. 89 (1970)