Estate Of Stranahan v. Commissioner

472 F.2d 867 (6th Cir. 1973)

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Nature of the Case

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Facts

Stranahan owed the IRS $754,815.72 for interest due to deficiencies in federal income, estate and gift taxes for several trusts he created in 1932. Stranahan paid that amount during the 1964 tax year. Stranahan decided that he would accelerate his future income to avoid losing the tax benefit of the interest deduction. To do this Stranahan executed an agreement with his son under which Stranahan assigned $122,820 in anticipated stock dividends for which the son paid $115,000 by check dated December 22, 1964. Stranahan then reported the $115,000 as ordinary income and was thus able to deduct the full amount of the $754,815.72. During the tax year in question dividends of $40,500 were reported to be paid over to son. Son reported these on his return as ordinary income subject to the offset of $115,000 resulting in a net taxable income of $7,282. The IRS claimed that the $40,500 was taxable to Stranahan's (now deceased) estate. The Tax Court determined that this transaction was merely a loan masquerading as a sale as it lacked any business purpose.