QUASI-CONTRACTS-TAXATION-RESCISSION OF GIFTS WHERE GIFT FAILS TO ACHIEVE DONOR'S PURPOSE OF MINIMIZING FEDERAL INCOME TAXES

Authors

Charles M. Soller S.Ed., University of Michigan Law SchoolFollow
Edwin F. Uhl S. Ed., University of Michigan Law SchoolFollow

Abstract

A recent Michigan case, Stone v. Stone, presents problems of complexity and far-reaching importance. The plaintiffs, husband and wife, each owned a one-half interest in a family business partnership, and each apparently reported a proportionate share of the partnership earnings for federal income tax purposes. For the purpose of further reducing taxes on the income of the family unit, each parent transferred a one-quarter interest in the partnership to one of their two minor children, and thereafter each parent and child filed separate income tax returns reporting one-fourth of the partnership earnings as individual income. Each parent, under a probate court appointment, acted as guardian for one of the children in accepting the transferred business interests. The United States Supreme Court then announced its decision in Commissioner v. Tower, and the Commissioner of Internal Revenue accordingly refunded the income taxes paid by the wife and children and ruled that since the father managed and controlled the business without any contribution of services by the wife and children, the entire partnership income for the year was taxable to the father. Because the total business income was then returnable by one person instead of four, the income came within a higher surtax bracket and greatly, increased the total tax, all payable by the father, who as an individual received only one-fourth of the total partnership income taxed to him. Conceding the correctness of the. commissioner's determination, the plaintiffs brought action to set aside the gifts to the children. In the alternative, the father sought to recover from each guardianship estate the amount of the taxes refunded for the year, plus its pro rata share of the total increased tax. The guardian ad litem, who was a neutral guardian appointed in the instant proceeding, admitted the desirability of relief by way of rescission. The Supreme Court of Michigan affirmed a decree granting rescission of the transfers to the children, basing its decision on the premise that the plaintiffs had made the gifts under a mistake as to their "antecedent and existing private legal rights."

Recommended Citation

Charles M. Soller S.Ed. & Edwin F. Uhl S. Ed., QUASI-CONTRACTS-TAXATION-RESCISSION OF GIFTS WHERE GIFT FAILS TO ACHIEVE DONOR'S PURPOSE OF MINIMIZING FEDERAL INCOME TAXES, 46 Mich. L. Rev. 1079 (1948).
Available at: https://repository.law.umich.edu/mlr/vol46/iss8/6