Also known as: adequate consideration · full consideration · sufficient consideration
Written by attorneys — see sources below.
2 senses
An objective valuation standard applied to transfers of property. A transfer qualifies as a bona fide sale when the transferor receives property or money equal in value to the property transferred. The standard determines whether the transfer depletes the transferor's estate or triggers gift tax liability.
An objective valuation standard applied to transfers of property. A transfer qualifies as a bona fide sale when the transferor receives property or money equal in value to the property transferred. The standard determines whether the transfer depletes the transferor's estate or triggers gift tax liability.
Value or benefit exchanged in a transaction that the law deems sufficient to support an enforceable agreement or valid share issuance. The standard confirms that each party has restricted its freedom or provided something of legal value in return.
Value or benefit exchanged in a transaction that the law deems sufficient to support an enforceable agreement or valid share issuance. The standard confirms that each party has restricted its freedom or provided something of legal value in return.
Each sense below has its own examples, sources, and questions.
Arthur Abrams transferred his vacation home to his adult daughter during his lifetime. In exchange he received cash equal to the home's appraised market value plus a promissory note secured by other assets. At his death the executor excluded the home from the augmented estate because the transfer met the adequate and full consideration test.
Amber Alonzo attempted to place an expectancy in a yet-to-be-formed corporation into a trust for her children. The court held the transfer lacked adequate and full consideration because the expectancy had no present value and no bargained-for exchange occurred.
In December 1927, the taxpayer contemplated trading in the stock market during 1928 after deciding that conditions were favorable. He consulted a lawyer who advised that it was possible for him to trade in trust for his children and other members of his family. He stated to them that he declared a trust of his stock trading during 1928 for the benefit of his family. Taxpayer agreed to assume personally any losses resulting from the venture, and to distribute the profits, if any, in equal shares to his wife, mother, and two minor children after deducting a reasonable compensation for his services. The taxpayer’s two children were one and three years of age at the time. During 1928 the taxpayer carried on the trading operations contemplated. At the end of the year he determined his compensation at slightly less than $10,000, which he reported in his income tax return for that year. The profits remaining were then divided in approximately equal shares among the members of his family, and the amounts were reported in their respective tax returns for 1928. The amounts allocated to the beneficiaries were credited to them on the taxpayer’s books, but they did not receive the cash except to a small extent in the case of the taxpayer’s mother. The Board of Tax Appeals held that the income in controversy was taxable to the petitioner as a part of his gross income for 1928 and decided that there was a deficiency. The petitioner seeks review of that decision in this court.
View caseAriana Azizi's university maintained racially discriminatory policies while claiming tax-exempt status. The Court ruled the institution did not qualify because its practices were not supported by adequate and full consideration in a commercial sense.
Until 1970 the Internal Revenue Service granted tax-exempt status to private schools without regard to their racial admissions policies under section 501(c)(3) of the Internal Revenue Code. On January 12, 1970, a three-judge district court issued a preliminary injunction in Green v. Kennedy prohibiting the IRS from according tax-exempt status to private schools in Mississippi that discriminated on the basis of race. In July 1970 the IRS concluded it could no longer legally justify allowing tax-exempt status to private schools practicing racial discrimination and announced it would not treat gifts to such schools as charitable deductions. The IRS formalized its revised policy in Revenue Ruling 71-447, stating that a school not having a racially nondiscriminatory policy as to students is not charitable within the common-law concepts reflected in sections 170 and 501(c)(3). Bob Jones University is a nonprofit corporation located in Greenville, South Carolina, whose purpose is to conduct an institution of learning giving special emphasis to the Christian religion and the ethics revealed in the Holy Scriptures. The university operates a school with an enrollment of approximately 5,000 students from kindergarten through college and graduate school and requires its teachers to be devout Christians while teaching all courses according to the Bible. Until 1971 the university completely excluded Negroes. From 1971 to May 1975 it accepted no applications from unmarried Negroes but did accept applications from Negroes married within their race. Following the Fourth Circuit decision in McCrary v. Runyon, the university revised its policy. Since May 1975 the university has permitted unmarried Negroes to enroll while maintaining a disciplinary rule that prohibits interracial dating and marriage and expels students who violate it. The university continues to deny admission to applicants engaged in an interracial marriage or known to advocate interracial marriage or dating. Until 1970 the IRS extended tax-exempt status to Bob Jones University under section 501(c)(3). On January 19, 1976, the IRS officially revoked the university's tax-exempt status effective December 1, 1970. The university paid a $21 federal unemployment tax for 1975, had its refund request denied, and filed suit in the United States District Court for the District of South Carolina seeking recovery of that amount while the government counterclaimed for $489,675.59 in unpaid taxes for 1971 through 1975. The district court ordered the IRS to pay the refund and rejected the counterclaim, but the Fourth Circuit reversed. Goldsboro Christian Schools is a nonprofit corporation located in Goldsboro, North Carolina, established to conduct an institution of learning giving special emphasis to the Christian religion and the ethics revealed in the Holy Scriptures. Since its incorporation in 1963 the school has maintained a racially discriminatory admissions policy based upon its interpretation of the Bible. Goldsboro has for the most part accepted only Caucasians. On occasion, however, the school has accepted children from racially mixed marriages in which one of the parents is Caucasian. Upon audit the IRS determined that Goldsboro was not an organization described in section 501(c)(3) and required it to pay taxes under the Federal Insurance Contribution Act and the Federal Unemployment Tax Act. Goldsboro paid the IRS $3,459.93 in taxes for one employee for the years 1969 through 1972 and filed suit in the United States District Court for the Eastern District of North Carolina seeking a refund while the government counterclaimed for $160,073.96 in unpaid taxes. The district court granted summary judgment to the IRS on its counterclaim, and the Fourth Circuit affirmed per curiam. The Supreme Court granted certiorari in both cases. The cases were argued on October 12, 1982. The Court decided the cases on May 24, 1983.
2 common questions
Property transferred during marriage is excluded from the augmented estate to the extent the decedent received adequate and full consideration in money or money's worth. The exclusion prevents inclusion of arm's-length sales that do not deplete the estate.
Supporting sources
The excess value of the property transferred over the value of the consideration received is treated as a taxable gift under the objective test of I.R.C. § 2512(b).
Alexandra Armstrong sold a parcel subject to a racial covenant. The buyer later sought to enforce the restriction against a subsequent purchaser. The Court held the covenant unenforceable because the original transaction did not involve adequate and full consideration supporting the restraint.
In February 1911, thirty out of thirty-nine owners of property fronting both sides of Labadie Avenue between Taylor Avenue and Cora Avenue in St. Louis signed a recorded agreement. The agreement restricted the use and occupancy of the properties for fifty years to persons of the Caucasian race. It excluded occupancy by people of the Negro or Mongolian race. The district included fifty-seven parcels of land. The signers held title to forty-seven parcels. At the time, five parcels were owned by Negroes, with one occupied by Negro families since 1882. On August 11, 1945, the Shelley petitioners, who are Negroes, purchased one parcel from Fitzgerald by warranty deed for valuable consideration without knowledge of the restriction. On October 9, 1945, respondents sued in the Circuit Court of St. Louis to restrain the Shelleys and divest title. The trial court denied relief, but the Supreme Court of Missouri reversed and directed enforcement. In June 1934, Ferguson and his wife executed a contract restricting their Detroit property to Caucasian occupancy. The restriction was effective only if at least eighty percent of the lots in the block were subjected to similar restrictions. The restrictions were to remain in effect until January 1, 1960. Similar agreements covered eighty percent of the lots. By deed dated November 30, 1944, the McGhee petitioners, who were Negroes, acquired and occupied the Detroit property. On January 30, 1945, respondents sued in Wayne County Circuit Court. The court ordered them to move within ninety days and enjoined future occupancy. The Supreme Court of Michigan affirmed. Petitioners claimed that judicial enforcement violated the Fourteenth Amendment.
View caseAmelia Amari's company owned Grand Central Terminal and challenged landmark restrictions as a taking. The Court analyzed whether the regulatory burden was offset by adequate and full consideration in the form of transferable development rights.
In 1965 New York City enacted the Landmarks Preservation Law, which created an eleven-member Landmarks Preservation Commission and authorized it to designate buildings at least thirty years old that possess special historical or aesthetic interest. The law required owners of designated landmarks to obtain Commission approval before altering exterior architectural features and imposed an affirmative duty to keep those features in good repair. In August 1967 the Commission designated Grand Central Terminal a landmark and the city tax block it occupies a landmark site; the Board of Estimate confirmed the designation the following month. Penn Central Transportation Co. and its affiliates owned the Terminal, an eight-story Beaux-Arts structure completed in 1913 that served as the main station for the New York Central and Harlem lines. On January 22, 1968, Penn Central entered a fifty-year renewable lease with UGP Properties, Inc., under which UGP agreed to construct a multistory office building cantilevered above the Terminal and to pay Penn Central at least three million dollars annually after construction. Penn Central and UGP submitted two plans prepared by architect Marcel Breuer: Breuer I, a fifty-five-story tower resting on the Terminal roof, and Breuer II Revised, a fifty-three-story building that would have removed part of the 42d Street facade. After four days of hearings at which over 80 witnesses testified, the Commission denied this application as to both proposals. Penn Central filed suit in New York Supreme Court, Trial Term, seeking a declaratory judgment, injunctive relief, and damages for a temporary taking. The trial court granted the injunctive and declaratory relief. The Appellate Division reversed, holding that Penn Central had failed to prove deprivation of all reasonable beneficial use. The New York Court of Appeals affirmed, concluding that the Terminal could still earn a reasonable return and that transferable development rights provided significant compensation. The Supreme Court noted probable jurisdiction.
Albert Allen and his partner orally agreed that one would perform household services in exchange for a share of property appreciation. The court enforced the agreement because contributions to the relationship supplied adequate and full consideration.
In October 1964, plaintiff and defendant entered into an oral agreement. While the parties lived together, they would combine their efforts and earnings. They would share equally any and all property accumulated as a result of their efforts, whether individual or combined. They further agreed to hold themselves out to the general public as husband and wife. Plaintiff would render her services as a companion, homemaker, housekeeper, and cook to defendant. Shortly thereafter, plaintiff agreed to give up her lucrative career as an entertainer and singer. She did so to devote her full time to defendant as a companion, homemaker, housekeeper, and cook. In return, defendant agreed to provide for all of plaintiff's financial support and needs for the rest of her life. The parties lived together from October 1964 through May 1970. During this period, as a result of their efforts and earnings, they acquired in defendant's name substantial real and personal property. This included motion picture rights worth over $1 million. In May 1970, defendant compelled plaintiff to leave his household. He continued to support plaintiff until November 1971 but thereafter refused to provide further support. Plaintiff brought this action asserting two causes of action. The first, for declaratory relief, asked the court to determine her contract and property rights. The second sought to impose a constructive trust upon one half of the property acquired during the course of the relationship. Defendant answered the complaint after an unsuccessful demurrer. Following extensive discovery and pretrial proceedings, the case came to trial. When the case was called for trial, plaintiff sought leave to file an amended complaint. The trial court treated defendant's motion to dismiss as one for judgment on the pleadings. This was augmented by a stipulation that defendant's marriage to Betty Marvin did not terminate until the filing of a final decree of divorce in January 1967. The court granted the motion and entered judgment for defendant. Plaintiff moved to set aside the judgment. She asked leave to amend her complaint to allege that she and defendant reaffirmed their agreement after the divorce became final. The trial court denied the motion. Plaintiff appealed from the judgment.
2 common questions
Yes. When the board determines before issuance that the consideration received is adequate, that determination is conclusive on whether the shares are validly issued, fully paid, and nonassessable.
Supporting sources
Yes. Corporate statutes permit issuance of shares for any tangible or intangible property or benefit to the corporation, including patents and contracts for services, provided the board determines the consideration adequate.
Supporting sources
…that, in recent years, large numbers of historic structures, landmarks, and areas have been destroyed without adequate consideration of either the values represented therein or the possibility of preserving the destroyed properties for use in economically productive ways. The second is a widely shared belief that…