BURGER, C. J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, BLACKMUN, POWELL, STEVENS, and O‘CONNOR, JJ., joined. REHNQUIST, J., filed a dissenting opinion, post, p. 200.

Norman E. Beal argued the cause and filed a brief for petitioners.

Stuart A. Smith argued the cause for respondent. With him on the brief were Solicitor General Lee, Assistant Attorney General Archer, Jonathan S. Cohen, and Gilbert S. Rothenberg.^*

CHIEF JUSTICE BURGER delivered the opinion of the Court.

We granted certiorari to resolve a Circuit conflict as to whether a donor who makes a gift of property on condition that the donee pay the resulting gift tax receives taxable income to the extent that the gift tax paid by the donee exceeds the donor‘s adjusted basis in the property transferred.

454 U. S. 813 (1981). The United States Court of Appeals for the Eighth Circuit held that the donor realized income.

643 F. 2d 499 (1981). We affirm.

I

A

Diedrich v. Commissioner of Internal Revenue

In 1972 petitioners Victor and Frances Diedrich made gifts of approximately 85,000 shares of stock to their three children, using both a direct transfer and a trust arrangement. The gifts were subject to a condition that the donees pay the resulting federal and state gift taxes. There is no dispute concerning the amount of the gift tax paid by the donees. The donors’ basis in the transferred stock was $51,073; the gift tax paid in 1972 by the donees was $62,992. Petitioners did not include as income on their 1972 federal income tax returns any portion of the gift tax paid by the donees. After an audit the Commissioner of Internal Revenue determined that petitioners had realized income to the extent that the gift tax owed by petitioners but paid by the donees exceeded the donors’ basis in the property. Accordingly, petitioners’ taxable income for 1972 was increased by $5,959.¹ Petitioners filed a petition in the United States Tax Court for redetermination of the deficiencies. The Tax Court held for the taxpayers, concluding that no income had been realized.

39 TCM 433 (1979).

B

United Missouri Bank of Kansas City v. Commissioner of Internal Revenue

In 1970 and 1971 Mrs. Frances Grant gave 90,000 voting trust certificates to her son on condition that he pay the resulting gift tax. Mrs. Grant‘s basis in the stock was $8,742.60; the gift tax paid by the donee was $232,630.09 As in Diedrich, there is no dispute concerning the amount of the gift tax or the fact of its payment by the donee pursuant to the condition.

Like the Diedrichs, Mrs. Grant did not include as income on her 1970 or 1971 federal income tax returns any portion of the amount of the gift tax owed by her but paid by the donee. After auditing her returns, the Commissioner determined that the gift of stock to her son was part gift and part sale, with the result that Mrs. Grant realized income to the extent that the amount of the gift tax exceeded the adjusted basis in the property. Accordingly, Mrs. Grant‘s taxable income was increased by approximately $112,000.² Mrs. Grant filed a petition in the United States Tax Court for redetermination of the deficiencies. The Tax Court held for the taxpayer, concluding that no income had been realized.

Grant v. Commissioner, 39 TCM 1088 (1980).

C

The United States Court of Appeals for the Eighth Circuit consolidated the two appeals and reversed, concluding that “to the extent the gift taxes paid by donees” exceeded the donors’ adjusted bases in the property transferred, “the donors realized taxable income.”

643 F. 2d, at 504. The Court of Appeals rejected the Tax Court‘s conclusion that the taxpayers merely had made a “net gift” of the difference between the fair market value of the transferred property and the gift taxes paid by the donees. The court reasoned that a donor receives a benefit when a donee discharges a donor‘s legal obligation to pay gift taxes. The Court of Appeals agreed with the Commissioner in rejecting the holding in

Turner v. Commissioner, 49 T. C. 356 (1968), aff‘d per curiam,

410 F. 2d 752 (CA6 1969), and its progeny, and adopted the approach of

Johnson v. Commissioner, 59 T. C. 791 (1973), aff‘d,

495 F. 2d 1079 (CA6), cert. denied,

419 U. S. 1040 (1974), and

Estate of Levine v. Commissioner, 72 T. C. 780 (1979), aff‘d,

634 F. 2d 12 (CA2 1980). We granted certiorari to resolve this conflict, and we affirm.

II

A

Pursuant to its constitutional authority, Congress has defined “gross income” as income “from whatever source derived,” including “[i]ncome from discharge of indebtedness.” 26 U. S. C. § 61 (a)(12).³ This Court has recognized that “income” may be realized by a variety of indirect means. In

Old Colony Trust Co. v. Commissioner, 279 U. S. 716 (1929), the Court held that payment of an employee‘s income taxes by an employer constituted income to the employee. Speaking for the Court, Chief Justice Taft concluded that “[t]he payment of the tax by the employe[r] was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor.”

Id., at 729. The Court made clear that the substance, not the form, of the agreed transaction controls. “The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.” Ibid. The employee, in other words, was placed in a better position as a result of the employer‘s discharge of the employee‘s legal obligation to pay the income taxes; the employee thus received a gain subject to income tax.

The holding in Old Colony was reaffirmed in

Crane v. Commissioner, 331 U. S. 1 (1947). In Crane the Court concluded that relief from the obligation of a nonrecourse mortgage in which the value of the property exceeded the value of the mortgage constituted income to the taxpayer. The taxpayer in Crane acquired depreciable property, an apartment building, subject to an unassumed mortgage. The taxpayer later sold the apartment building, which was still subject to the nonrecourse mortgage, for cash plus the buyer‘s assump-tion of the mortgage. This Court held that the amount of the mortgage was properly included in the amount realized on the sale, noting that if the taxpayer transfers subject to the mortgage,

“the benefit to him is as real and substantial as if the mortgage were discharged, or as if a personal debt in an equal amount had been assumed by another.”

Id., at 14.⁴

Again, it was the “reality,” not the form, of the transaction that governed. Ibid. The Court found it immaterial whether the seller received money prior to the sale in order to discharge the mortgage, or whether the seller merely transferred the property subject to the mortgage. In either case the taxpayer realized an economic benefit.

B

The principles of Old Colony and Crane control.⁵ A common method of structuring gift transactions is for the donor to make the gift subject to the condition that the donee pay the resulting gift tax, as was done in each of the cases now before us. When a gift is made, the gift tax liability falls on the donor under 26 U. S. C. § 2502(d).⁶ When a donor makes a gift to a donee, a “debt” to the United States for the amount of the gift tax is incurred by the donor. Those taxes are as much the legal obligation of the donor as the donor‘s income taxes; for these purposes they are the same kind of debt obligation as the income taxes of the employee in Old Colony, supra. Similarly, when a donee agrees to discharge an indebtedness in consideration of the gift, the person relieved of the tax liability realizes an economic benefit. In short, the donor realizes an immediate economic benefit by the donee‘s assumption of the donor‘s legal obligation to pay the gift tax.

An examination of the donor‘s intent does not change the character of this benefit. Although intent is relevant in determining whether a gift has been made, subjective intent has not characteristically been a factor in determining whether an individual has realized income.⁷ Even if intent were a factor, the donor‘s intent with respect to the condition shifting the gift tax obligation from the donor to the donee was plainly to relieve the donor of a debt owed to the United States; the choice was made because the donor would receive a benefit in relief from the obligation to pay the gift tax.⁸

Finally, the benefit realized by the taxpayer is not diminished by the fact that the liability attaches during the course of a donative transfer. It cannot be doubted that the donors were aware that the gift tax obligation would arise immediately upon the transfer of the property; the economic benefit to the donors in the discharge of the gift tax liability is indistinguishable from the benefit arising from discharge of a preexisting obligation. Nor is there any doubt that had the donors sold a portion of the stock immediately before the gift transfer in order to raise funds to pay the expected gift tax, a taxable gain would have been realized. 26 U. S. C. § 1001. The fact that the gift tax obligation was discharged by way of a conditional gift rather than from funds derived from a pregift sale does not alter the underlying benefit to the donors.

C

Consistent with the economic reality, the Commissioner has treated these conditional gifts as a discharge of indebtedness through a part gift and part sale of the gift property transferred. The transfer is treated as if the donor sells the property to the donee for less than the fair market value. The “sale” price is the amount necessary to discharge the gift tax indebtedness; the balance of the value of the transferred property is treated as a gift. The gain thus derived by the donor is the amount of the gift tax liability less the donor‘s adjusted basis in the entire property. Accordingly, income is realized to the extent that the gift tax exceeds the donor‘s adjusted basis in the property. This treatment is consistent with § 1001 of the Internal Revenue Code, which provides that the gain from the disposition of property is the excess of the amount realized over the transferor‘s adjusted basis in the property.⁹

III

We recognize that Congress has structured gift transactions to encourage transfer of property by limiting the tax consequences of a transfer. See, e. g., 26 U. S. C. § 102 (gifts excluded from donee‘s gross income). Congress may obviously provide a similar exclusion for the conditional gift. Should Congress wish to encourage “net gifts,” changes in the income tax consequences of such gifts lie within the legislative responsibility. Until such time, we are bound by Congress’ mandate that gross income includes income “from whatever source derived.” We therefore hold that a donor who makes a gift of property on condition that the donee pay the resulting gift taxes realizes taxable income to the extent that the gift taxes paid by the donee exceed the donor‘s adjusted basis in the property.¹⁰

The judgment of the United States Court of Appeals for the Eighth Circuit is

Affirmed.

JUSTICE REHNQUIST, dissenting.

It is a well-settled principle today that a taxpayer realizes income when another person relieves the taxpayer of a legal obligation in connection with an otherwise taxable transaction. See

Crane v. Commissioner, 331 U. S. 1 (1947) (sale of real property);

Old Colony Trust Co. v. Commissioner, 279 U. S. 716 (1929) (employment compensation). In neither Old Colony nor Crane was there any question as to the existence of a taxable transaction; the only question concerned the amount of income realized by the taxpayer as a result of the taxable transaction. The Court in this case, however, begs the question of whether a taxable transaction has taken place at all when it concludes that “[t]he principles of Old Colony and Crane control” this case. Ante, at 196.

In Old Colony, the employer agreed to pay the employee‘s federal tax liability as part of his compensation. The employee provided his services to the employer in exchange for compensation. The exchange of compensation for services was undeniably a taxable transaction. The only question was whether the employee‘s taxable income included the employer‘s assumption of the employee‘s income tax liability.

In Crane, the taxpayer sold real property for cash plus the buyer‘s assumption of a mortgage. Clearly a sale had occurred, and the only question was whether the amount of the mortgage assumed by the buyer should be included in the amount realized by the taxpayer. The Court rejected the taxpayer‘s contention that what she sold was not the property itself, but her equity in that property.

Unlike Old Colony or Crane, the question in this case is not the amount of income the taxpayer has realized as a result of a concededly taxable transaction, but whether a taxable transaction has taken place at all. Only after one concludes that a partial sale occurs when the donee agrees to pay the gift tax do Old Colony and Crane become relevant in ascertaining the amount of income realized by the donor as a result of the transaction. Nowhere does the Court explain why a gift becomes a partial sale merely because the donor and donee structure the gift so that the gift tax imposed by Congress on the transaction is paid by the donee rather than the donor.

In my view, the resolution of this case turns upon congressional intent: whether Congress intended to characterize a gift as a partial sale whenever the donee agrees to pay the gift tax. Congress has determined that a gift should not be considered income to the donee. 26 U. S. C. § 102. Instead, gift transactions are to be subject to a tax system wholly separate and distinct from the income tax. See 26 U. S. C. § 2501 et seq. Both the donor and the donee may be held liable for the gift tax. §§ 2502(d), 6324(b). Although the primary liability for the gift tax is on the donor, the donee is liable to the extent of the value of the gift should the donor fail to pay the tax. I see no evidence in the tax statutes that Congress forbade the parties to agree among themselves as to who would pay the gift tax upon pain of such an agreement being considered a taxable event for the purposes of the income tax. Although Congress could certainly determine that the payment of the gift tax by the donee constitutes income to the donor, the relevant statutes do not affirmatively indicate that Congress has made such a determination.

I dissent.