- 40 -
foreign trusts, section 679 does not apply unless we conclude
that the transfer to Clend was, in substance, an indirect
transfer to the foreign trusts.40
Although respondent argues that section 679 allows us to
conclude that Clend must be disregarded, we need not reach this
issue. The record raises serious doubt regarding whether the
foreign trusts had actually acquired Clend before Clend allegedly
executed the stock purchase agreements with the Melniks.
Moreover, the record suggests that, after Clend was acquired, it
functioned primarily as a conduit in connection with the sale of
the HouTex stock and the investment of the resulting proceeds.
In Commissioner v. Court Holding Co., 324 U.S. 331, 334
(1945), the Supreme Court of the United States held that the sale
of an apartment building by a corporation’s shareholders was, in
substance, a sale by the corporation. The Supreme Court
explained its holding as follows:
The incidence of taxation depends upon the substance of
a transaction. The tax consequences which arise from
gains from a sale of property are not finally to be
determined solely by the means employed to transfer
legal title. Rather, the transaction must be viewed as
a whole, and each step, from the commencement of
40Sec. 1.679-3(f), Income Tax Regs., which applies to
transfers after Aug. 7, 2000, see sec. 1.679-7, Income Tax Regs.,
provides that, if a U.S. person is a related person (such as a
grantor or beneficiary) to a foreign trust, then any property
transferred from the U.S. person to an entity in which the
foreign trust holds an ownership interest is treated as a
transfer by the U.S. person to the foreign trust followed by a
transfer from the foreign trust to the entity owned by the
foreign trust.
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