Farid-Es-Sultaneh v. Commissioner
160 F.2d 812 (2d Cir. 1947)
- Farid got engaged to Kresge
(who founded the K-Mart Department Store chain). He gave her some stock
worth $290 a share in case something happened to him before they got
- A little later Farid signed an
ante-nuptial agreement (aka a pre-nup), saying that in exchange for the
stock, she wouldn't claim any alimony or any of Kresge's property in case of
- At the time the ante-nuptial
agreement was signed, the stock was worth $315 a share (and by the time
it actually got put in her name, it was worth $330).
- They got married. Four years
later, they got a divorce. Farid sold the stock. When she reported the
sale to the IRS, there was a disagreement over the initial value (aka the basis) of the stock.
- The IRS argued that since
the stock was a gift, the basis should be the value of the stock when Kresge
acquired it (which was less than $5 a share).
- See 26 U.S.C. §1015 and Taft v. Bowers (278 U.S. 470 (1929)), which explain the carry
over basis rule.
- Farid argued that the stock
was consideration for her signing the pre-nup, it wasn't a gift at all. Therefore the basis should be the value of the stock when she
signed the pre-nup ($315 a share).
- The Trial Court found for the
IRS, Farid appealed.
- The Appellate Court reversed
and found for Farid.
- The Appellate Court found
that the initial promise Kresge made was contingent on his dying before
he got married. Since he didn't die, he never really made a gift to Farid.
- The Court found that by
signing the pre-nup and giving up her right to alimony, Farid was making
a contract, so her acquisition of the stock wasn't a gift at all, it was part of a contract.
- The Court found that the basis for property acquired via contract is the
value on of the property at the time the contract was signed (in this