Category: Gift & Estate; International;
Corporations
Subject: Gift or Compensation?
Title: Gift of Stock in Commercial Context
IRC Sections: 61, 102, 311(b) and 336
Filename: 1192.html
Date Produced: 12/96 Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background and Issues
Taxpayer (TP) is a domestic C corporation owned 100% by a U.S.
individual (SH). One of TP's clients is a foreign corporation
(FC) for whom TP is a major and apparently critical supplier of
goods or services. In order to cement the relationship between
TP and FC and presumably to insure a steady source of supply of
the goods or services provided by TP, FC plans to give TP a portion
of the stock of another foreign corporation (GIFTCO) which stock
is valued at between $1.2 and $2.0 million. The immediate tax issues are as follows. 1. Is the gift a taxable event to TP?
2. What happens if TP subsequently liquidates or otherwise distributes
the gifted stock to the shareholder of TP? Comments
Our whole system of taxation in the United States is based on
the concept of income inclusivity. Under IRC Section 61, gross
income for tax purposes includes income from whatever source derived.
In essence, any economic gain resulting from a closed transaction
is taxable unless explicitly excluded. IRC Section 102 excludes gifts from definition of gross income
for tax purposes. The ultimate question here is whether it is
possible to receive a gift in a commercial context such as this. The seminal case is Commissioner v. Duberstein, 363 U.S. 278,
60-2 USTC ¶9515 (USSC 1960). Here, the Supreme Court considered
the case of Mr. Duberstein who had received a purported gift of
an automobile from Mr. Berman, the president of a company with
whom Mr. Duberstein's company frequently did business. Over the
years, Mr. Duberstein had provided Berman with business contacts
that had proved very valuable to Berman's business. In finding
the gift of the automobile to be taxable income to Mr. Duberstein,
the Court stated the following principle. To be considered a gift, the payment must proceed from a detached
and disinterested generosity; out of affection, respect, admiration,
charity or similar impulse. The intention of the transferor is
controlling. It is clear from Duberstein and its progeny that the question
of whether a purported gift is really a gift for tax purposes
(with respect to the donee) is purely a factual determination
to be made based on the unique facts and circumstances of each
case. It seems to me the unvarnished view of the present case is
that detached and disinterested generosity is totally lacking
as a motivation for the purported gift. As I understand it, the
donor is making the gift in order to bolster its relationship
with a critical supplier. While the parties might attempt to otherwise
characterize this transfer, it seems to me that a trier of facts
in possession of all the information would more than likely reach
that very conclusion. Accordingly, I feel that there is very substantial
risk to the taxpayer if the GIFTCO stock is excluded from gross
income. As to the issue of what would happen if the stock were distributed,
I offer the following thoughts. -No matter how the receipt of stock is characterized, its
distribution would have tax consequences both at the corporate
level and the shareholder level. -Distribution of the GIFTCO stock either in liquidation, redemption
of SH's stock, or as a dividend would trigger gain in the corporation
to the extent the fair market value of the GIFTCO stock at the
time of distribution exceeds its adjusted tax basis. IRC Sections
311(b) and 336. -Obviously, the shareholder would be taxed on the fair market
value of the stock distributed as a dividend or on the excess
of the fair market value of the GIFTCO stock over the basis of
the shareholder's TP stock in a redemption or liquidation. -The basis of the GIFTCO stock in TP's hands would be its
fair market value at the date of receipt if TP recognizes the
receipt as a taxable event. If TP successfully maintains that
the receipt is a gift, TP's basis would likely carry over from
the donor's cost basis. Query: I wonder if the fact that the
donor is not a U.S. person affects this latter conclusion. If
TP wishes to pursue the gift position, this should be verified.
Alternative Structuring Suggestions
Suppose FC gives the stock to SH instead of TP. On the surface
at least, this would avoid double taxation of the stock. Is there
a personal relationship between SH and FC or any of its officers
or shareholders? Would it be possible based on the legal and tax
constraints facing FC to transfer the stock to SH instead? Could
a factual case be made that the transfer is really a gift to SH?
Presumably, TP is doing nothing personally for FC except in his
capacity as an employee-officer of TP. That being the case, it
might be easier to sustain the gift argument. It seems to me this strategy has a rather nasty downside. Assume
that all the facts are laid bare, and the true motivation of the
donor is clear to the IRS and/or the courts. Would not the transfer
of the stock to SH instead of TP be easily viewed as a sham to
be recharacterized as a taxable transfer to TP followed by a dividend
of the stock to SH? Other Issues
If the gift is consummated, a variety of other tax issues come
into play depending on what proportion of GIFTCO TP actually owns,
the business GIFTCO is in, the geographical area in which GIFTCO
operates, and other factors. I am concerned here about TP's disclosure
requirements, the foreign tax credit implications, as well as
the possible application of the Subpart-F rules and/or the PFIC
or the FPHC provisions. | 
