311 U.S. 112 (1940), 27, Helvering v. Horst

Docket NºNo. 27
Citation311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75
Party NameHelvering v. Horst
Case DateNovember 25, 1940
CourtUnited States Supreme Court

Page 112

311 U.S. 112 (1940)

61 S.Ct. 144, 85 L.Ed. 75

Helvering

v.

Horst

No. 27

United States Supreme Court

Nov. 25, 1940

Argued October 25, 1940

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

1. Where, in 1934 and 1935, an owner of negotiable bonds, who reported income on the cash receipts basis, detached from the bonds negotiable interest coupons before their due date and delivered them as a gift to his son, who, in the same year, collected them at maturity, held that, under § 22 of the Revenue Act of 1934, and in the year that the interest payments were made, there was a realization of income, in the amount of such payments, taxable to the donor. P. 117.

2. The dominant purpose of the income tax laws is the taxation of income to those who earn or otherwise create the right to receive it and who enjoy the benefit of it when paid. P. 119.

3. The tax laid by the 1934 Revenue Act upon income "derived from . . . wages or compensation for personal service, of whatever kind and in whatever form paid . . . ; also from interest . . . " cannot fairly be interpreted as not applying to income derived from interest or compensation when he who is entitled to receive it makes use of his power to dispose of it in procuring satisfactions which he would otherwise procure only by the use of the money when received. P. 119.

4. This case distinguished from Blair v. Commissioner, 300 U.S. 5, and compared with Lucas v. Earl, 281 U.S. 111, and Burnet v. Leininger, 285 U.S. 136. Pp. 118-120.

107 F.2d 906, reversed.

Certiorari, 309 U.S. 650, to review the reversal of an order of the Board of Tax Appeals, 39 B.T.A. 757, sustaining a determination of a deficiency in income tax.

Page 114

STONE, J., lead opinion

MR. JUSTICE STONE delivered the opinion of the Court.

The sole question for decision is whether the gift, during the donor's taxable year, of interest coupons detached from the bonds, delivered to the donee and later in the year paid at maturity, is the realization of income taxable to the donor.

In 1934 and 1935, respondent, the owner of negotiable bonds, detached from them negotiable interest coupons shortly before their due date and delivered them as a gift to his son, who, in the same year, collected them at maturity. The Commissioner ruled that, under the applicable § 22 of the Revenue Act of 1934, 48 Stat. 680, 686, the interest payments were taxable, in the years when paid, to the respondent donor, who reported his income on the cash receipts basis. The circuit court of appeals reversed the order of the Board of Tax Appeals sustaining the tax. 107 F.2d 906; 39 B.T.A. 757. We granted certiorari, 309 U.S. 650, because of the importance of the question in the administration of the revenue laws and because of an asserted conflict in principle of the decision below with that of Lucas v. Earl, 281 U.S. 111, and with that of decisions by other circuit courts of appeals. See Bishop v. Commissioner, 54 F.2d 298; Dickey v. Burnet, 56 F.2d 917, 921; Van Meter v. Commissioner, 61 F.2d 817.

The court below thought that, as the consideration for the coupons had passed to the obligor, the donor had, by the gift, parted with all control over them and their payment, and for that reason the case was distinguishable

Page 115

from Lucas v. Earl, supra, and Burnet v. Leininger, 285 U.S. 136, where the assignment of compensation for services had preceded the rendition of the services, and where the income was held taxable to the donor.

The holder of a coupon bond is the owner of two independent and separable kinds of right. One is the right to demand and receive at maturity the principal amount of the bond representing capital investment. The other is the right to demand and receive interim payments of interest on the investment in the amounts and on the dates specified by the coupons. Together, they are an obligation to pay principal and interest given in exchange for money or property which was presumably the consideration for the obligation of the bond. Here respondent, as owner of the bonds, had acquired the legal right to demand payment at maturity of the interest specified by the coupons and the power to command its payment to others which constituted an economic gain to him.

Admittedly not all economic gain of the taxpayer is taxable income. From the beginning, the revenue laws have been interpreted as defining "realization" of income as the taxable event, rather than the acquisition of the right to receive it. And "realization" is not deemed to occur until the income is paid. But the decisions and regulations have consistently recognized that receipt in cash or property is not the only characteristic of realization of income to a taxpayer on the cash receipts basis. Where the taxpayer does not receive payment of income in money or property, realization may occur when the last step is taken by which he obtains the fruition of the economic gain which has already accrued to him. Old Colony Trust Co. v. Commissioner, 279 U.S. 716; Corliss v. Bowers, 281 U.S. 376, 378. Cf. Burnet v. Wells, 289 U.S. 670.

In the ordinary case the taxpayer who acquires the right to receive income is taxed when he receives it, regardless of the time when his right to receive payment

Page 116

accrued. But the rule that income is not taxable until realized has [61 S.Ct. 147] never been taken to mean that the taxpayer, even on the cash receipts basis, who has fully enjoyed the benefit of the economic gain represented by his right to receive income can escape taxation because he has not himself received payment of it from his obligor. The rule, founded on administrative convenience, is only one of postponement of the tax to the final event of enjoyment of the income, usually the receipt of it by the taxpayer, and not one of exemption from taxation where the enjoyment is consummated by some event other than the taxpayer's personal receipt of money or property. Cf. Aluminum Castings Co. v. Routzahn, 282 U.S. 92, 98. This may occur when he has made such use or disposition of his power to receive or control the income as to procure in its place other satisfactions which are of economic worth. The question here is whether, because one who in fact receives payment for services or interest payments is taxable only on his receipt of the payments, he can escape all tax by giving away his right to income in advance of payment. If the taxpayer procures payment directly to his creditors of the items of interest or earnings due him, see Old Colony Trust Co. v. Commissioner, supra; Bowers v. Kerbaugh-Empire Co., 271 U.S. 170; United States v. Kirby Lumber Co., 284 U.S. 1, or if he sets up a revocable trust with income payable to the objects of his bounty, §§ 166, 167, Corliss v. Bowers, supra; cf. Dickey v. Burnet, 56 F.2d 917, 921, he does not...

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865 practice notes
  • 157 F.2d 235 (2nd Cir. 1946), 266, McAllister v. C.I.R.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Second Circuit
    • August 6, 1946
    ...income taxes in the years in question. The continued authority of the case was recognized in Helvering v; Horst, 311 UkS. 112, 118, 119, 61 S.Ct. 144, 85 LkEdk 75, 131 A;L;R. 655, although a majority of the Court thought it not applicable on the facts, and in Harrison v. Schaffner, 312 U.S.......
  • 221 F.2d 944 (2nd Cir. 1955), 109, C.I.R. v. Bagley & Sewall Co.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Second Circuit
    • April 21, 1955
    ...78 L.Ed. 212, to which is applied the pertinent sections of the law according to common understanding and experience, Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, is the measure of the law's requirement. We find no comparable authority wherein a contract is dissected and its......
  • 304 F.Supp. 627 (N.D.Ill. 1969), 62 C 672, United States Gypsum Co. v. United States
    • United States
    • Federal Cases United States District Courts 7th Circuit Northern District of Illinois
    • June 11, 1969
    ...reflect the income of the actual earner. It is basically a codification of the long established principle expressed in Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940), that income should be taxed to the party who earned it. Or, as recently stated by our Seventh Circuit Co......
  • 309 F.2d 587 (8th Cir. 1962), 16975, First Nat. Bank of Kansas City v. C.I.R.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Eighth Circuit
    • November 8, 1962
    ...contention he attempts to distinguish Commissioner v. P. G. Lake, Inc., supra; Hort v. Commissioner, supra; and Helvering v. Horst, 1940, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, in which only the right to income and not the supporting property was transferred. In Arnfeld v. United States, ......
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848 cases
  • 157 F.2d 235 (2nd Cir. 1946), 266, McAllister v. C.I.R.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Second Circuit
    • August 6, 1946
    ...income taxes in the years in question. The continued authority of the case was recognized in Helvering v; Horst, 311 UkS. 112, 118, 119, 61 S.Ct. 144, 85 LkEdk 75, 131 A;L;R. 655, although a majority of the Court thought it not applicable on the facts, and in Harrison v. Schaffner, 312 U.S.......
  • 221 F.2d 944 (2nd Cir. 1955), 109, C.I.R. v. Bagley & Sewall Co.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Second Circuit
    • April 21, 1955
    ...78 L.Ed. 212, to which is applied the pertinent sections of the law according to common understanding and experience, Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, is the measure of the law's requirement. We find no comparable authority wherein a contract is dissected and its......
  • 304 F.Supp. 627 (N.D.Ill. 1969), 62 C 672, United States Gypsum Co. v. United States
    • United States
    • Federal Cases United States District Courts 7th Circuit Northern District of Illinois
    • June 11, 1969
    ...reflect the income of the actual earner. It is basically a codification of the long established principle expressed in Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940), that income should be taxed to the party who earned it. Or, as recently stated by our Seventh Circuit Co......
  • 309 F.2d 587 (8th Cir. 1962), 16975, First Nat. Bank of Kansas City v. C.I.R.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Eighth Circuit
    • November 8, 1962
    ...contention he attempts to distinguish Commissioner v. P. G. Lake, Inc., supra; Hort v. Commissioner, supra; and Helvering v. Horst, 1940, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, in which only the right to income and not the supporting property was transferred. In Arnfeld v. United States, ......
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  • Supreme Court Docket Report, October Term, 2003 - Number 10
    • United States
    • Mondaq United States
    • April 27, 2004
    ...rule, taxpayers cannot avoid paying federal income taxes by assigning to another person income not yet received. See Helvering v. Horst, 311 U.S. 112 (1940); Lucas v. Earl, 281 U.S. 111 (1930). There is a conflict among the circuits regarding whether fees paid to an attorney under a conting......
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    ...T.C. 399,453-57 (2000) (Beghe, J. dissenting), aff'd, 259 F.3d 881 (7th Cir. 2001). (35) Id. at 427. (36) See, e.g., Helvering v. Horst, 311 U.S. 112 (1940); Lucas v. Earl, 281 U.S. 111 (1930). (37) See, e.g., Kenseth v. Commissioner, 259 F.3d 881 (7th Cir. 2001). (38) Id. at 883. (39) For ......
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    ...(1949); Helvering v. Eubank, 311 U.S. 122, 124-25 (1940); Lucas v. Earl, 281 U.S. 111, 114-15 (1930). (108.) See Helvering v. Horst, 311 U.S. 112, 117-20 (1940); Blair v. Comm'r, 300 U.S. 5, 12-14(1937). (109.) See generally 3 BORIS I. BITTKER & LAWRENCE LOKKEN, FEDERAL TAXATION OF INCO......
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