Sather v. Commissioner

The Sather family owned all the stock in Sather, Inc. The family included brothers Larry, John, Duane, and Rodney (plaintiffs). Rodney was unmarried and had no children, but the wives of the other brothers—Kathy, Sandra, and Diane (plaintiffs)—were also owners of the business. Larry, John, and Duane each had three children. The brothers sought advice from an accountant as how to best transfer the business to their respective children. On December 31, 1992, Larry, John, Duane, Kathy, Sandra, and Diane each transferred $9,997 of stock to each of their children and nieces and nephews. On January 5, 1993, Larry, John, and Duane then transferred $19,994 worth of stock to each of their nieces and nephews. There were also additional transfers—each wife transferred $3,283 in stock to each of her own children, and Rodney made transfers to his nieces, nephews, and brothers. Since Rodney received nothing in exchange, his transfers were not at issue. Larry, John, Duane, Kathy, Sandra, and Diane each filed gift-tax returns for 1992 and 1993, claiming on both returns nine $10,000 gift-tax exclusions, one for each child, niece, and nephew. The IRS (defendant) ultimately allowed each person to claim only three of the $10,000 exclusions, the ones to each person’s own children. The government argued that the others were constructive gifts to the donors’ children. The gift tax applies to both direct or indirect gifts, and the reciprocal-trust doctrine is used to evaluate such transfers, considering whether the transactions in question were interrelated and whether they left the settlors in the same position as if they had made direct gifts. The Sathers argued that a consideration of all the transactions together—including Rodney’s—indicated economic substance rather than a mere reciprocal transaction. The tax court found for the government, and the Sathers appealed.