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 married.
  • 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 divorce.
    • 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 case $315).