160 F.2d 812 (2d Cir. 1947)
Farid-Es-Sultaneh v. Commissioner is a foundational federal income tax case at the junction of tax, contracts, and family law.
For federal income tax purposes, when a fiancée receives appreciated stock from her prospective spouse pursuant to an antenuptial agreement in exchange for her promise to marry and release of marital rights, does she take (i) a carryover "gift" basis or (ii) a cost basis equal to the fair market value of the stock at the time of transfer?
Property acquired by a taxpayer in a bargained-for exchange for valuable consideration is not acquired by "gift" for income tax basis purposes, and the taxpayer's basis is cost—measured by the fair market value of the property received (or of the consideration given) at the time of the exchange. Although the federal gift and estate tax statutes require "adequate and full consideration in money or money's worth" to avoid gift characterization in that context, those standards do not control the income tax determination of whether a transfer was gratuitous or a purchase for basis purposes. The release of enforceable marital rights under state law constitutes valuable consideration sufficient to take an antenuptial transfer out of the income tax gift-basis rule.
The stock transfer to the taxpayer pursuant to the antenuptial agreement was not a gift for income tax purposes; it was a transfer for consideration—the taxpayer's promise to marry and release of marital rights. Accordingly, the taxpayer's basis in the stock was its fair market value at the time she acquired it.
Farid-Es-Sultaneh is a staple of federal income tax courses because it clarifies that the gift-versus-sale inquiry for income tax basis turns on whether the transfer is gratuitous, not on gift/estate tax concepts of "money or money's worth." It illustrates how state-law rights (marital/elective share rights) can constitute valuable consideration in federal tax analysis and how basis should reflect the transferee's investment when property is exchanged for those rights. The case also foreshadows later developments: for many years, transfers incident to divorce were treated as taxable exchanges (see United States v. Davis) until Congress enacted I.R.C. § 1041 (1984), which now generally provides nonrecognition and carryover basis for interspousal and certain divorce-related transfers. Farid remains highly instructive for pre-marital transfers, characterization issues, and the doctrinal separation between income and transfer taxes.