Law School Case Brief
Helvering v. Horst - 311 U.S. 112, 61 S. Ct. 144 (1940)
The rule that income is not taxable until realized has never been taken to mean that a taxpayer 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. One who gives giving away his right to interest income in advance of payment does not escape taxation because he did not actually receive the money. His obvious exercise of such control supports the idea that he had earned the interest and that it was taxable to him.
Respondent, the owner of negotiable bonds, detached from the bonds 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. Petitioner ruled that under § 22 of the Revenue Act of 1934, 48 Stat. 686, the interest payments were taxable, in the years when paid, to respondent donor who reported this income on the cash receipts basis. The court of appeals reversed an order sustaining the tax.
Was the gift of the coupons during respondent donor's taxable year, delivered to the donee and later in the year paid at maturity, the realization of income taxable to respondent?
The Court noted that the rule that income is not taxable until realized has 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 Court posited that the taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income to procure those satisfactions, or whether he disposes of his right to collect it as the means of procuring them. In this case, the Court ruled that although the donor, by the transfer of the coupons, has precluded any possibility of his collecting them himself, he has nevertheless, by his act, procured payment of the interest as a valuable gift to a member of his family. As such, the Court held that that the deficiency was properly assessed against respondent because when respondent gave the gift of the coupons, he separated his right to interest payments from his investment and procured the payment of the interest to his donee and enjoyed the economic benefits of the income in the same manner and to the same extent as though the transfer were of earnings.
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