Background
Prior to his death on October 7, 1948, Susie Salvatore's husband owned and operated a gas station in Greenwich, Connecticut. Upon his death, his entire estate was bequeathed to his wife. For the next several years, Susie Salvatore, her three sons, and one of her two daughters operated the gas station.
As time passed, several of the Salvatore children moved on while the land on which the gas station was located became increasingly valuable, to the point where several oil companies made offers to purchase the property. The family rejected several proposals, until in the summer of 1963, Texaco, Inc. made a proposal to purchase the land for $295,000.
To ensure Susie Salvatore's accustomed weekly stipend (received from the operation of the gas station), she was to receive $100,000 of the proceeds. The remainder was to be divided amongst her children. To effectuate this, petitioner conveyed a one-half interest in the property to the children and the deeds would be executed by the children and petitioner when conveying the property to Texaco.
On July 24, 1963, the Salvatore family formally accepted the offer from Texaco. Not until August 28, 1963, however, was a warranty deed conveying an undivided one-half interest in the property to her five children executed. On that same date, warranty deeds were executed conveying the property to Texaco, at which point Texaco paid the balance of the purchase price (less the $50,000 mortgage).
In 1963, Susie Salvatore then filed a Federal gift tax return reporting gifts of 1/10 interest in the property to each of the five children. In her income tax return for that year, she only reported her share of the gain from the sale of the gas station as a long-term capital gain plus a small ordinary gain. The children reported their respective shares on their income tax forms as well.
The Commissioner of Internal Revenue contested that the entire gain on the sale of the property was taxable as a long-term capital gain, a tax much higher than the gift tax paid by Susie Salvatore.
Read more about this topic: Salvatore V. Commissioner
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