Cases Flashcards
U.S. v. Kirby Lumber Co.
TP issued bonds for which it had received the par value of the bonds, and in the same year, repurchased some on the open market for $140k less than par
Ruled that discharge of a corporate debt for an amount less than the face of the debt resulted in income to the debtor
- Clear benefit economically from the discharge, even though it did not fit the Eisner definition of income
- In repurchasing, TP had an asset which was not offset by any liability, so TP had greater assets than it had before
TP should recognize GI in the amount of the difference between the amount it received for the bonds when issued and the amount it paid for the bonds upon repurchase
Distinguished from Kerbaugh bc the transaction there, as a whole, was a loss By contrast, as a result of its repurchase, Kirby Lumber made available $140k in assets previously offset by the obligation of those bonds
Holding emphasizes two (2) points for recognizing discharge of indebtedness income:
- Taxpayer was solvent at all relevant times; and
- Balance sheet of the TP reflected an increased net worth (or “clear gain”) as a result of the reduction of liabilities without a dollar-for-dollar reduction of assets
Commissioner v. Glenshaw Glass
Instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion is GI (widely inclusive and elastic)
Noted that Macomber’s definition was not meant to provide a touchstone to all future gross income questions; congress intended by its definition of GI to tax all gains except those specifically exempted (e.g. §102 gifts and bequests, etc…)
Eisner v. Macomber
Income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets
Hawkins v. Commissioner noted that this definition was incomplete, as there may be cases in which taxable income will be judicially found although outside the precise scope of the description already given
Old Colony Trust v Commissioner
**Payment of another’s debt is income **
- Company resolved to pay the taxes of its officers, and this was considered GI
- Paid government 69% income tax off the $980,000 he was paid, which was $680,000 (essentially got paid an additional $680,000 to take tax off)
- Government gets tax off the 980,000 salary, and also taxes the 680,000 compensation for additional 300,000
- Essentially got paid 1.6 million, and was taxed about 1 million
Higgins v. Commissioner
Higgins v. Commissioner held that **carrying on one’s own investment activities does not constitute trade or business **
Cesarini v. United States
- Found treasure trove in a piano they purchased, even though treasure trove is not expressed under §61 as gross income, it is GI nevertheless
- 3 year statute of limitations begins to vest after they find it, not when it (unknowingly) first comes into their possession
- § 61 is so broad and sweeping, there must be an expressed exclusion, or else ascension to wealth is generally gonna be regarded as GI
Cottage Savings Ass’n v. Commissioner:
- Savings and loan ass’n realized losses on the exchange of its interest in one group of home mortgage loans for interest in a different group of home mortgage loans
- Realization is founded on administrative convenience (Helvering v. Horst)
- **Exchange of property gives rise to a realization event as long as the exchanged properties are materially different – legally distinct entitlements **
Philadelphia Park Amusement Co. v. US
Philadelphia Park Amusement Co. deeded its interest in a bridge to the city in exchange for a ten year extension on a franchise.
Issue: What is Philly’s basis in the 10-year extension.
Holding: G/R-the cost basis of the property received in a taxable exchange is the fair market value of the property received in the exchange. SO, the basis is the value of the 10-year extension.
Caveat: When you cannot figure out the value of the property received with reasonable certainty, it is presumed that the value of the property received is the same is the property given (SO value of the bridge is the basis in the extension).
- When property is exchanged for property in a taxable exchange, the taxpayer is taxed on the difference between the AB of the property given in exchange, and the FMV of the property received in exchange
- Upon exchange of property, you are taxed for the net gain or loss that is incurred. Afterwards, the basis in the property you received is its FMV
Commissioner v. Duberstein:
- Facts: Duberstein was given a “Caddy” by a business associate but did not declare the care as taxable income. The business associate took a business expense for the “Caddy” in that year. Duberstein did not report it as GI, citing the §102 gift provision
- Gift in the statutory sense proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or other impulses
- Most critical consideration is the transferor’s intent, which is determined through a totality of the circumstances approach
- Holding: Although the intent of the gift is an important factor, it is not controlling. There must be an objective analysis as to whether what is called a gift amounts to it in reality. A gift in the statutory sense, proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses. In SUM, we must look at the totality of the circumstances, the main-springs of human conduct.
Goodwin v. United States
Facts: Members of Rev. Goodwin’s congregation began making gifts to him, initially on Christmas and later on three special occasion days each year. For the tax years 1987-1989, the Goodwins received $15,000 in “special occasion gifts” each year.
Issue: Whether these sums of money were really gifts or were simply compensation for services.
Holding: Objective prospective: **the cash payments were gathered by congregation leaders in routinized, highly structured program. Individual Church members contributed anonymously, and the regularly-scheduled payments were made to Rev. Goodwin on behalf of the whole congregation. ** In addition, the congregation knew that w/o these substantial on-going cash payments, the Church likely could not retain the services of a popular and successful minister at the relatively low salary it was paying.
- The highly structured, rooted, and regular program establishes the money raised by the congregation, given to the pastor as compensation, not a gift
- The Congregation’s (transferor) motive for this payment program was essentially for compensation purposes
Wolder v. Commisioner:
Wolder, a lawyer, agreed to render legal services to a client w/o billing them in exchange for money and stocks bequeathed to him in her will.
Holding: In Duberstein, the Supreme Court held that the true test with respect to gifts was whether the gift was bona fide gift, or simply a method for paying compensation. The bequest was in effect a delayed payment for services.
- The bequest was simply the form chosen to provide compensation for services, the property’s status as a “bequest” was irrelevant to its characterization for tax purposes, and it was held to be income
Gehl v. Commissioner
§108 grants an exclusion to insolvent TPs only as to income from the discharge of indebtedness, it does not preclude the realization and recognition of income from other sources (such as where gain is realized on a transfer of appreciated property by an insolvent debtor to a creditor in partial satisfaction of a debt)
EX: Aaron owes Barney $50k, and accepts a tract of land in satisfaction of the full debt. Land had FMV of $30k and AB of $20k
Aaron will have discharge of indebtedness income excludable under §108 of $20k
He recognizes $10k gain ($30k FMV - $20k AB) and $20k discharge of indebtedness income ($50k - $30k) in $30k satisfaction of debt (FMV of property)
Pellar v. Commissoner.
If you buy something at a great price (a bargain, get it?) the amount that you paid versus the fair market value is lower. Is this taxed as gross income?
Not if the transaction is at arm’s length
