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afternoon of August 31, 1966, the foundation had the
voting power to prevent the redemption, if it wished to
do so. In these circumstances, at the time of the
gift, the redemption had not proceeded far enough along
for us to conclude that the foundation was powerless to
reverse the plans of the petitioner. In light of the
presence of an actual, valid gift and because the
foundation was not a sham, we hold that the gift of
stock was not in substance a gift of the proceeds of
redemption. [Id. at 695.]
The Internal Revenue Service (IRS), in Rev. Rul. 78-197,
1978-1 C.B. 83, acquiesced to our decision in Palmer v.
Commissioner, supra, and in doing so devised a “bright-line” test
which focuses on the donee’s control over the disposition of the
appreciated property. Rev. Rul. 78-197, 1978-1 C.B. at 83,
states:
In Palmer v. Commissioner, 62 T.C. 684 (1974),
aff’d on another issue, 523 F.2d 1308 (8th Cir. 1975),
the United States Tax Court held that the Internal
Revenue Service incorrectly treated a gift of stock to
an organization exempt from income taxation pursuant to
section 511(c)(3) of the Internal Revenue Code of 1954,
followed by a prearranged redemption of the stock, as a
redemption of the stock from the donor followed by a
gift of the redemption proceeds to the donee. The
Service will follow Palmer on this issue, acq., page 6,
this Bulletin.
In Palmer, the taxpayer had voting control of both
a corporation and a tax-exempt private foundation.
Pursuant to a single plan, the taxpayer donated shares
of the corporation’s stock to the foundation and then
caused the corporation to redeem the stock from the
foundation. It was the position of the Service that the
substance of the transaction was a redemption of the
stock from the taxpayer, taxable under section 301 of
the Code, followed by a gift of the redemption proceeds
by the taxpayer to the foundation. The United States
Tax Court rejected this argument and treated the
transaction according to its form because the
foundation was not a sham, the transfer of stock to the
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