On Appeal from the Decision of the United States Tax Court.
Before Pell and Wood, Circuit Judges, and Baker, District Judge.*fn*
The issue presented is whether under the circumstances of this case the transfer of assets and the contemporaneous assumption of the transferor's liability by the transferee is taxable to the transferor when the liability assumed by the transferee exceeds the adjusted basis in the assets transferred. We hold that, in this case, the transferor realized taxable income to the extent the liability assumed by the transferee exceeds the transferor's adjusted basis in the assets.
The facts of the present controversy are not in dispute as the parties have entered a stipulation of the relevant facts. Petitioner-taxpayer Dr. Teofilo Evangelista,*fn1 on July 24, 1972, purchased thirty-three Matador automobiles at a cost of $102,670 from the GOMA Corporation of Madison, Wisconsin. The cars were purchased subject to an existing lease with an agency of the United States government. To have sufficient proceeds to effect this purchase, Dr. Evangelista, on the same day, executed a promissory note payable to the Park Bank in Madison for $106,000. Dr. Evangelista was personally liable for payment of the note. The bank also took a purchase money consensual security interest in the thirty-three automobiles.
Petitioner personally owned the Matadors for a little less than one year. During the parts of the two tax years in which he owned the automobiles, Dr. Evangelista and his wife Frances reported income received from the leased autos and claimed depreciation expenses of $34,233.33 for each tax year.*fn2 On July 3, 1973, when the adjusted basis in the autos was $34,203.34, Dr. Evangelista transferred his entire interest in the thirty-three Matadors and the related lease to a trust established for the sole benefit of his two children. That same day the trustee, Dr. Evangelista's wife Frances, assumed primary liability for the payment of the remaining balance of the note owed to the Park Bank, which at that time was $62,603.36.*fn3
The Evangelistas did not pay any income tax on the transfer. Nor is there any indication in the record that they filed a gift tax return for the transfer. Further, the Evangelistas offered no evidence concerning the fair market value of the thirty-three automobiles on the date of the transfer.
The Commissioner of the Internal Revenue determined deficiencies in the Evangelistas' taxes of $5,834.66 for 1972 and $13,377.03 for 1973.*fn4 The Commissioner, relying on Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S. Ct. 499, 73 L. Ed. 918 (1929); Crane v. Commissioner, 331 U.S. 1, 67 S. Ct. 1047, 91 L. Ed. 1301 (1947); and Section 1001 of the Internal Revenue Code,*fn5 reasoned that the Evangelistas realized income and taxable gain in the transfer to the extent that the primary liability of which Dr. Evangelista was relieved exceeded the adjusted basis in the property transferred.*fn6 The Tax Court agreed with the Commissioner.*fn7 Petitioner appealed.
The Commissioner's first position is that under Section 1001 of the Code, the Evangelistas are subject to income tax as a result of the transfer because they received consideration from the transferee which exceeded the adjusted basis in the automobiles. Under Section 1001 "(t)he gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis . . . ." I.R.C. § 1001(a). The Commissioner asserts that the transfer, whether it be considered a gift or not, was a taxable disposition and that under Section 1001 the assumption of the primary liability by the transferee was a taxable amount realized by the Evangelistas to the extent it exceeded the adjusted basis in the automobiles.*fn8
Contrary to the Commissioner's position, we feel that the characterization of the transaction as a gift, part gift-part sale, or some other taxable disposition determines the income tax consequences. Subsection (a) of Section 1001 provides for the computation of gain or loss on the "sale or other disposition of property." Subsection (b) defines the amount realized from such a disposition. Neither subsection purports to define what is a taxable disposition nor when a disposition becomes taxable; they both only instruct how to measure any amount realized. See I.R.C. § 1001(a), (b); United States v. Davis, 370 U.S. 65, 68-69, 82 S. Ct. 1190, 1192, 8 L. Ed. 2d 335 (1962); Gutbro Holding Co. v. Commissioner, 138 F.2d 16, 21 (2d Cir. 1943). Neither subsection makes any gain taxable which otherwise would not be. To determine the taxability of a gain one must refer to other provisions of the Code. For instance, the taxability of a sale or exchange was provided for in Section 1002. The use of the language "other disposition" in subsections (a) and (b), contrary to the Commissioner's contention, does not mean any amount realized to the donor associated with a gift is taxable as income.*fn9
The Commissioner's reliance on Crane v. Commissioner, 331 U.S. 1, 67 S. Ct. 1047, 91 L. Ed. 1301 and Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S. Ct. 499, 73 L. Ed. 918 for his position that the present transaction, whether a gift or not, is a taxable disposition is misplaced. In both cases the transaction involved a taxable disposition. In Crane the transaction was a sale, taxable under another provision of the Code. In Old Colony Trust the amount realized was compensation for labor services, also a transaction whose taxability is not questioned. Neither case suggests that a gift may be a taxable disposition to the donor.*fn10
No other provision of the Internal Revenue Code specifically makes a gift taxable to the donor. While there is no section specifically excluding any value accruing to the donor in a pure gift situation, indications are that there are no income tax consequences if the transaction is a gift. Gifts are predominantly treated pursuant to the gift tax provisions of the Code, a totally different taxing scheme. Pursuant to I.R.C. § 102, the donee's receipt of a gift is excluded from income tax treatment. Further, cases suggest that a gift is ordinarily not a taxable disposition. See e. g., Campbell v. Prothro, 209 F.2d 331 (5th Cir. 1954) (gift of appreciated property does not give rise to recognition of gain even when deductions have been taken for business expenses which were necessary to the appreciation of the property). The Commissioner briefly mentions Section 61 as a possible Code source for establishing the taxability of a gift. This is a very general provision which merely defines gross income to include: "Gains derived from dealings in property . . . ." I.R.C. § 61(a)(3). Congress, in establishing the taxability of gains arising from a sale or exchange of property, did not rely on Section 61(a)(3) but felt it necessary to provide for this in a separate Code provision. This and the other indications concerning the general taxability of a gift suggest to us that if Congress intended a transfer that is properly characterized as a gift to be a taxable disposition it would have shown this intent more explicitly.
The proper inquiry is whether a given transaction is properly characterizable as a gift or as a taxable disposition.*fn11 In Commissioner v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 4 L. Ed. 2d 1218 (1960), the Supreme Court clarified the circumstances in which a transfer of property constituted a gift. Eschewing an opportunity to establish an easy to apply test, the Court stated that the determination of whether a transfer is a gift depends on an objective inquiry of all the circumstances to assess the "intention with which payment, however voluntary, has been made." Id. at 285-86, 80 S. Ct. at 1197. If the transaction "proceeds from a "detached and disinterested generosity,' Commissioner v. LoBue, 351 U.S. 243, 246 (76 S. Ct. 800, 802, 100 L. Ed. 1142), "out of affection, respect, ...