                         T.C. Memo. 1996-255



                      UNITED STATES TAX COURT



    ESTATE OF HILDA F. CORBETT, DECEASED, MICHAEL A. SWEENEY,
            ADMINISTRATOR, Petitioner v. COMMISSIONER
                 OF INTERNAL REVENUE, Respondent



     Docket Nos. 13791-94, 13792-94.            Filed June 3, 1996.



     Michael A. Sweeney, for petitioner.

     Terry W. Vincent, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   These cases were consolidated for trial,

briefing, and opinion.   By notices dated May 11, 1994, respondent

determined a deficiency in decedent’s 1990 gift tax in the amount

of $23,029 and in petitioner’s estate tax in the amount of

$47,061.   The issue before the Court is whether petitioner may
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disavow the form of, and previous tax reporting relating to, a

transaction.    We hold that petitioner may not.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.      At

the time the petitions in these cases were filed, James E.

Corbett, Executor, resided in Akron, Ohio.    James E. Corbett died

on March 28, 1995.    Michael A. Sweeney, the duly appointed and

acting Administrator of the Estate of Hilda F. Corbett, and the

Estate of Hilda F. Corbett have mailing addresses in Akron, Ohio.

     Hilda F. Corbett was married to James E. Corbett during all

relevant periods until her death in 1992.    James and Hilda’s son,

David, was married to Billie Jean Corbett during all relevant

periods.   In May 1974, David and Billie Jean purchased a house

located at 2424 West Market Street in Akron, Ohio (the House),

for $68,000.

     During 1986, David and Billie Jean experienced financial

difficulties.    As of March 20, 1986, the House was subject to

mortgages of approximately $68,000, and David and Billie Jean

owed approximately $4,000 in back taxes.     David asked his father,

James, for $72,000 to pay off these debts.

     James agreed to give David $72,000 on the condition that

David transfer to James and Hilda the title to the House.      David

agreed to do so.    On March 20, 1986, David and Billie Jean

transferred the House in fee simple to James and Hilda by

survivorship deed for $72,000.    The transfer was reported in this
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manner to the Summit County, Ohio, auditor’s office.    The fair

market value of the House exceeded $72,000 at the time of the

transfer.    In each of the years 1986-90, James and Hilda claimed

Federal income tax deductions for the real property taxes paid on

the House.    David and Billie Jean, however, continued to live in

the House and did not pay rent.

     In 1990, Richard M. Hamlin, a neighbor of David and Billie

Jean, approached them with an offer to purchase the House for

$300,000.    David discussed the offer with his father, and a

decision was made to sell the House.    On September 24, 1990,

James and Hilda transferred the House to David and Billie Jean by

general warranty deed for no consideration.    The transfer was

reported in this manner to the Summit County, Ohio, auditor’s

office.   Two days later, David and Billie Jean sold the House to

Hamlin for $300,000.    James and Hilda chose to split the gift as

permitted by section 2513 of the Internal Revenue Code, and Hilda

filed a gift tax return that reported the September 24, 1990,

transfer as a gift valued at $130,000 (i.e., $150,000 minus the

$10,000 annual exclusions for both David and Billie Jean).

     On October 13, 1992, Hilda died.    Her estate tax return was

filed on July 7, 1993.    The estate tax return reported the 1990

transfer of the House from James and Hilda to David and Billie

Jean as a gift.

     Respondent conducted an audit of petitioner’s estate tax

return and discovered that both Hilda’s 1990 gift tax return and
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the estate tax return failed to reflect certain taxable gifts

that Hilda had previously reported.      In 1990, when Hilda reported

on a gift tax return her share of the $300,000 transfer (i.e.,

$130,000), she listed prior taxable gifts of $480,000 (i.e., the

amount she reported transferring in 1989).     In fact, Hilda had

previously reported taxable gifts of $610,488.44, as shown in the

following chart:

                   Date                   Taxable Gifts

              March 1976                     $5,988.44
              December 1976                  10,500.00
              September 1979                 34,000.00
              December 1979                  80,000.00
              1989                          480,000.00
                Total                       610,488.44

     Respondent has proposed an adjustment to prior taxable gifts

of $130,488 (i.e., $610,488 minus $480,000).     This adjustment

would have the effect of increasing Hilda’s 1990 gift tax

liability by $23,029 and the estate tax liability by $47,061.

     Petitioner has conceded that Hilda omitted $130,488 in prior

taxable gifts that should have been included on her 1990 gift tax

return and on the estate tax return.     Petitioner contends,

however, that the characterization of the 1986 transaction as a

sale and of the September 24, 1990, transaction as a gift were in

error.

                               OPINION

     Petitioner contends that James and Hilda should not be

treated as having transferred the House to David and Billie Jean
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in 1990, because notwithstanding James and Hilda’s 1986 payment

of $72,000 for legal title to the House, David and Billie Jean at

all times retained their full interest in the House.   According

to petitioner, this position is justified because legal title was

transferred for less than fair market value and because David and

Billie Jean retained exclusive use, control, and enjoyment of the

House.   For support, petitioner cites section 2036 of the

Internal Revenue Code.

     Section 2036(a) provides in relevant part:

          The value of the gross estate shall include the
     value of all property to the extent of any interest
     therein of which the decedent has at any time made a
     transfer (except in case of a bona fide sale for an
     adequate and full consideration in money or money’s
     worth), by trust or otherwise, under which he has
     retained for his life or for any period not
     ascertainable without reference to his death or for any
     period which does not in fact end before his death--

          (1) the possession or enjoyment of, or the right
          to the income from, the property * * *

     Petitioner contends that if either David or Billie Jean had

died during the 1986-90 period, the estate would have been

required to include the value of the House, because David and

Billie Jean retained “the possession or enjoyment” of the House

after the 1986 transaction.   Petitioner further contends that if

David and Billie Jean did not effectively transfer the House to

James and Hilda in 1986, James and Hilda could not have

transferred the House back to David and Billie Jean in 1990,
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because “one cannot make a gift of something that one does not

own.”

     Based on the foregoing analysis, petitioner concludes that

Hilda was not liable for any gift tax as a result of the

September 24, 1990, transfer of legal title to the House from

James and Hilda to David and Billie Jean.   For the reasons

discussed below, we reject petitioner’s attempt to recharacterize

the 1986 and 1990 transactions.

     In Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967),

vacating en banc 44 T.C. 549 (1965), the U.S. Court of Appeals

for the Third Circuit imposed a limitation on a taxpayer’s

ability to prevail when using a “substance over form” argument.

The taxpayers in Danielson entered into covenants not to compete

as part of a stock sale transaction.   The purchase agreement

allocated part of the consideration to the covenants.   The

taxpayers reported on their Federal income tax returns that all

the proceeds from the transaction were from the sale of capital

assets.   The taxpayers defended their position by contending that

the allocation set forth in the agreement had no economic

foundation.   In rejecting the taxpayer’s position, the court

adopted the following rule:   “a party can challenge the tax

consequences of his agreement as construed by the Commissioner

only by adducing proof which in an action between the parties to

the agreement would be admissible to alter that construction or

to show its unenforceability because of mistake, undue influence,
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fraud, duress, etc.”   Id. at 775 (the Danielson Rule).    In

reaching its conclusion, the court cited several factors,

including “whipsaw” problems the Government would encounter if

taxpayers could unilaterally disavow the form of their

transactions for Federal tax purposes.   The U.S. Court of Appeals

for the Sixth Circuit, the circuit to which this case is

appealable, has generally adopted the Danielson Rule.     See

Schatten v. United States, 746 F.2d 319 (6th Cir. 1984).

     Not all circuits have adopted the Danielson Rule in cases

where taxpayers from the outset have taken tax reporting

positions consistent with their view of the substance of the

transaction.   But it is generally accepted that taxpayers may not

execute a transaction in one form, file returns consistent with

that form, and then argue for an alternative tax treatment after

their returns are audited.   See, e.g., Little v. Commissioner,

T.C. Memo. 1993-281 (concluding that taxpayers “are entitled to

attack the form of their transaction only when their tax

reporting and other actions have shown an honest and consistent

respect for what they argue is the substance of the

transaction.”).

     In Estate of Durkin v. Commissioner, 99 T.C. 561 (1992),

supplementing T.C. Memo. 1992-325, we considered and rejected an

attempt by a taxpayer to disavow the form of, and previous tax

reporting relating to, a transaction.    The taxpayer in that case

engaged in two simultaneous transactions with an unrelated
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individual involving (1) the taxpayer’s purchase of property and

(2) the taxpayer’s sale of stock.    The parties allocated the

consideration exchanged in the two transactions in a manner that

minimized tax liability.    The allocations, however, did not

reflect economic reality.    On audit, the Commissioner determined

that the taxpayer had purchased the property at a bargain price

and that the bargain element should be treated as a constructive

dividend.   Implicitly acknowledging the validity of the

Commissioner’s position, the taxpayer sought to recharacterize

the purchase as a stock redemption, which would have had the

effect of converting ordinary income to capital gain.

     The Court cited three reasons for rejecting the taxpayer’s

argument: (1) The taxpayer sought to disavow its own tax return

treatment of the transaction; (2) the taxpayer’s tax reporting

and actions did not show “an honest and consistent respect for

the substance of * * * [the] transaction”; and (3) the taxpayer

was unilaterally attempting to have the transaction treated

differently after it had been challenged by the Commissioner.

Id. at 574-575 (quoting Estate of Weinert v. Commissioner, 294

F.2d 750, 755 (5th Cir. 1961), revg. and remanding 31 T.C. 918

(1959)).

     The circumstances in the present case are similar to those

in Estate of Durkin v. Commissioner, supra.    First, petitioner

seeks to disavow its own tax return treatment of the transaction.

From 1986-90, James and Hilda deducted on their joint Federal
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income tax returns the real property taxes relating to the House.

Moreover, Hilda did not file a gift tax return for 1986. Yet

petitioner now contends that James and Hilda gave David and

Billie Jean $72,000 in exchange for no consideration.   In

addition, Hilda reported the 1990 transfer of the House to David

and Billie Jean as a $130,000 gift for Federal tax purposes.

     Second, Hilda’s tax reporting and actions did not show an

honest and consistent respect for what petitioner now contends

was the substance of the transaction.   The inconsistent tax

reporting is described above.   In addition, Hilda recorded the

1986 transaction as a transfer of the House for $72,000 and

recorded the 1990 transaction as a transfer of the House for no

consideration.   Both of these actions are consistent with the

making of a gift in 1990 and inconsistent with the making of a

gift in 1986.

     Third, petitioner did not attempt to challenge the tax

treatment of the 1986 and 1990 transactions until respondent

discovered that petitioner had failed to include previously

reported gifts on the estate tax return.

     Because Hilda treated the 1986 transaction as a sale and the

1990 transaction as a gift for both Federal tax and State law

purposes prior to respondent’s audit, we hold that petitioner may

not now challenge Hilda’s characterization of the 1986 and 1990

transactions.
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To reflect the foregoing,


                                  Decisions will be entered

                             for respondent.
