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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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