Consider now the many forms that an “accession to wealth” can take. Section 61(a) of the Code provides a non-exclusive list of fifteen items. Obviously, “gross income” includes compensation for services. § 61(a)(1). We should not be especially surprised that “gross income” includes the other items on the list. However, the first sentence of § 61(a) does not limit “gross income” to the items on this list. This point has required courts to consider whether various benefits constituted an “accession to wealth.” The following cases, some of which pre-date Glenshaw Glass, present some examples.
Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929)
MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
William M. Wood was president of the American Woolen Company during the years 1918, 1919, and 1920. In 1918 he received as salary and commissions from the company $978,725, which he included in his federal income tax return for 1918. In 1919, he received as salary and commissions from the company $548,132.87, which he included in his return for 1919.
August 3, 1916, the American Woolen Company had adopted the following resolution, which was in effect in 1919 and 1920:
Voted: That this company pay any and all income taxes, state and Federal, that may hereafter become due and payable upon the salaries of all the officers of the company, including the president, William M. Wood, ... to the end that said persons and officers shall receive their salaries or other compensation in full without deduction on account of income taxes, state or federal, which taxes are to be paid out of the treasury of this corporation.
... The American Woolen Company paid to the collector of internal revenue Mr. Wood’s federal income and surtaxes due to salary and commissions paid him by the company, as follows:
Taxes for 1918 paid in 1919 . . . . $681,169 88
Taxes for 1919 paid in 1920 . . . . $351,179 27
The decision of the Board of Tax Appeals here sought to be reviewed was that the income taxes of $681,169.88 and $351,179.27 paid by the American Woolen Company for Mr. Wood were additional income to him for the years 1919 and 1920.
The question certified by the circuit court of appeals for answer by this Court is:
Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?
... Coming now to the merits of this case, we think the question presented is whether a taxpayer, having induced a third person to pay his income tax or having acquiesced in such payment as made in discharge of an obligation to him, may avoid the making of a return thereof and the payment of a corresponding tax. We think he may not do so. The payment of the tax by the employers was in consideration of the services rendered by the employee, and was again derived by the employee from his labor. The form of the payment is expressly declared to make no difference. Section 213, Revenue Act of 1918, c. 18, 40 Stat. 1065 [§ 61]. It is therefore immaterial that the taxes were directly paid over to the government. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed. The certificate shows that the taxes were imposed upon the employee, that the taxes were actually paid by the employer, and that the employee entered upon his duties in the years in question under the express agreement that his income taxes would be paid by his employer. ... The taxes were paid upon a valuable consideration – namely, the services rendered by the employee and as part of the compensation therefor. We think, therefore, that the payment constituted income to the employee.
Nor can it be argued that the payment of the tax ... was a gift. The payment for services, even though entirely voluntary, was nevertheless compensation within the statute. ...
It is next argued against the payment of this tax that, if these payments by the employer constitute income to the employee, the employee will be called upon to pay the tax imposed upon this additional income, and that the payment of the additional tax will create further income which will in turn be subject to tax, with the result that there would be a tax upon a tax. This, it is urged, is the result of the government’s theory, when carried to its logical conclusion, and results in an absurdity which Congress could not have contemplated.
In the first place, no attempt has been made by the Treasury to collect further taxes upon the theory that the payment of the additional taxes creates further income, and the question of a tax upon a tax was not before the circuit court of appeals, and has not been certified to this Court. We can settle questions of that sort when an attempt to impose a tax upon a tax is undertaken, but not now. [citations omitted]. It is not, therefore, necessary to answer the argument based upon an algebraic formula to reach the amount of taxes due. The question in this case is, “Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?” The answer must be “Yes.”
Separate opinion of MR. JUSTICE McREYNOLDS [omitted].
Notes and Questions:
1. Taxpayers pay their federal income taxes from after-tax income. This was not always true. Act of Oct. 3, 1913, entitled “An act to reduce tariff duties and to provide revenue for the Government and for other purposes,” part IIB, granted a deduction for national taxes paid. After Congress repealed this deduction, the American Woolen Company began paying William Wood’s federal income taxes.
2. The Court seems to say both that taxpayer received additional compensation (taxable) and that taxpayer benefitted from third-party satisfaction of an obligation (also taxable).
A Little Algebra
Is the argument that the Commissioner creates a never-ending upward spiral of taxes upon taxes true?
- If taxpayer is to have $X remaining after payment of taxes and the tax rate is λ, then taxable income equal to $X/(1 − λ) will produce $X of after-tax income. Obviously, graduated tax rates would require some incremental computations.
- We call such a computation “grossing up.”
3. A taxpayer’s wealth increases when someone pays one of his/her obligations. Thus, when taxpayer’s employer pays taxpayer’s federal income taxes, taxpayer should include the amount of taxes in his/her gross income. The principal is applicable in other contexts as well.
- A key consideration is whether a third party makes a payment to satisfy an actual “obligation” of the taxpayer, or merely to “restore” to taxpayer “capital” rightfully belonging to him/her. SeeClarkinfra.
Clark v. Commissioner, 40 B.T.A. 333 (1939)
This is a proceeding to redetermine a deficiency in income tax for the calendar year 1934 in the amount of $10,618.87. The question presented is whether petitioner derived income by the payment to him of an amount of $19,941.10, by his tax counsel, to compensate him for a loss suffered on account of erroneous advice given him by the latter. The facts were stipulated and ... so far as material, follow:
3. The petitioner during the calendar year 1932, and for a considerable period prior thereto, was married and living with his wife. He was required by the Revenue Act of 1932 to file a Federal Income Tax Return of his income for the year 1932. For such year petitioner and his wife could have filed a joint return or separate returns.
4. Prior to the time that the 1932 Federal Income Tax return or returns of petitioner and/or his wife were due to be filed, petitioner retained experienced counsel to prepare the necessary return or returns for him and/or his wife. Such tax counsel prepared a joint return for petitioner and his wife and advised petitioner to file it instead of two separate returns. In due course it was filed with the Collector of Internal Revenue for the First District of California. ...
6. [Tax counsel had improperly deducted more than the allowable amount of capital losses.]
7. The error referred to in paragraph six above was called to the attention of the tax counsel who prepared the joint return of petitioner and his wife for the year 1932. Recomputations were then made which disclosed that if petitioner and his wife had filed separate returns for the year 1932 their combined tax liability would have been $19,941.10 less than that which was finally assessed against and paid by petitioner.
8. Thereafter, tax counsel admitted that if he had not erred in computing the tax liability shown on the joint return filed by the petitioner, he would have advised petitioner to file separate returns for himself and his wife, and accordingly tax counsel tendered to petitioner the sum of $19,941.10, which was the difference between what petitioner and his wife would have paid on their 1932 returns if separate returns had been filed and the amount which petitioner was actually required to pay on the joint return as filed. Petitioner accepted the $19,941.10.
9. In his final determination of petitioner’s 1934 tax liability, the respondent included the aforesaid $19,941.10 in income.
10. Petitioner’s books of account are kept on the cash receipts and disbursements basis and his tax returns are made on such basis under the community property laws of the State of California.
The theory on which the respondent included the above sum of $19,941.10 in petitioner’s gross income for 1934, is that this amount constituted taxes paid for petitioner by a third party and that, consequently, petitioner was in receipt of income to that extent. ... Petitioner, on the contrary, contends that this payment constituted compensation for damages or loss caused by the error of tax counsel, and that he therefore realized no income from its receipt in 1934.
We agree with the petitioner. ... Petitioner’s taxes were not paid for him by any person – as rental, compensation for services rendered, or otherwise. He paid his own taxes.
When the joint return was filed, petitioner became obligated to and did pay the taxes computed on that basis. [citation omitted] In paying that obligation, he sustained a loss which was caused by the negligence of his tax counsel. The $19,941.10 was paid to petitioner, not qua taxes [citation omitted], but as compensation to petitioner for his loss. The measure of that loss, and the compensation therefor, was the sum of money which petitioner became legally obligated to and did pay because of that negligence. The fact that such obligation was for taxes is of no moment here.
... And the fact that the payment of the compensation for such loss was voluntary, as here, does not change its exempt status. [citation omitted] It was, in fact, compensation for a loss which impaired petitioner’s capital.
Moreover, so long as petitioner neither could nor did take a deduction in a prior year of this loss in such a way as to offset income for the prior year, the amount received by him in the taxable year, by way of recompense, is not then includable in his gross income. Central Loan & Investment Co., 39 B.T.A. 981.
Decision will be entered for the petitioner.
Notes and Questions:
1. Does the Commissioner’s position follow from the Supreme Court’s holding in Old Colony Trust?
A return of capital is not gross income. After all, the capital that is returned has already been subject to income tax.
2. Is this holding consistent with SHS? What do you know from reading the case about what taxpayer’s after-tax wealth should have been? In fact, is that not what the court was referencing when it described the payment as “compensation for a loss which impaired [taxpayer’s] capital?
3. Why would it make a difference whether taxpayer previously deducted the amount restored to him?
Gotcher v. United States, 401 F.2d 118 (CA5 1968)
THORNBERRY, Circuit Judge.
In 1960, Mr. and Mrs. Gotcher took a twelve-day expense-paid trip to Germany to tour the Volkswagon facilities there. The trip cost $1372.30. His employer, Economy Motors, paid $348.73, and Volkswagon of Germany and Volkswagon of America shared the remaining $1023.53. Upon returning, Mr. Gotcher bought a twenty-five percent interest in Economy Motors, the Sherman, Texas Volkswagon dealership, that had been offered to him before he left. Today he is President of Economy Motors in Sherman and owns fifty percent of the dealership. Mr. and Mrs. Gotcher did not include any part of the $1372.30 in their 1960 income. The Commissioner determined that the taxpayers had realized income to the extent of the $1372.30 for the expense-paid trip and asserted a tax deficiency of $356.79, plus interest. Taxpayers paid the deficiency, plus $82.29 in interest, and thereafter timely filed suit for a refund. The district court, sitting without a jury, held that the cost of the trip was not income or, in the alternative, was income and deductible as an ordinary and necessary business expense. [citation omitted] We affirm the district court’s determination that the cost of the trip was not income to Mr. Gotcher ($686.15); however, Mrs. Gotcher’s expenses ($686.15) constituted income and were not deductible.
... The court below reasoned that the cost of the trip to the Gotchers was not income because an economic or financial benefit does not constitute income under § 61 unless it is conferred as compensation for services rendered. This conception of gross income is too restrictive since it is [well]-settled that § 61 should be broadly interpreted and that many items, including compensatory gains, constitute gross income. [footnote omitted]
Sections 101-123 specifically exclude certain items from gross income. Appellant argues that the cost of the trip should be included in income since it is not specifically excluded by §§ 101-123, reasoning that § 61 was drafted broadly to subject all economic gains to tax and any exclusions should be narrowly limited to the specific exclusions. [footnote omitted] This analysis is too restrictive since it has been generally held that exclusions from gross income are not limited to the enumerated exceptions. [footnote omitted] ...
In determining whether the expense-paid trip was income within § 61, we must look to the tests that have been developed under this section. The concept of economic gain to the taxpayer is key to § 61. H. Simons, Personal Income Taxation 51 (1938); J. Sneed, The Configurations of Gross Income 8 (1967). This concept contains two distinct requirements: There must be an economic gain, and this gain must primarily benefit the taxpayer personally. In some cases, as in the case of an expense-paid trip, there is no direct economic gain, but there is indirect economic gain inasmuch as a benefit has been received without a corresponding diminution of wealth. Yet even if expense-paid items, as meals and lodging, are received by the taxpayer, the value of these items will not be gross income, even though the employee receives some incidental benefit, if the meals and lodging are primarily for the convenience of the employer. See Int. Rev. Code of 1954, § 119.
… There is no evidence in the record to indicate that the trip was an award for past services since Mr. Gotcher was not an employee of VW of Germany and he did nothing to earn that part of the trip paid by Economy Motors.
The trip was made in 1959 when VW was attempting to expand its local dealerships in the United States. The ‘buy American’ campaign and the fact that the VW people felt they had a ‘very ugly product’ prompted them to offer these tours of Germany to prospective dealers. ... VW operations were at first so speculative that cars had to be consigned with a repurchase guarantee. In 1959, when VW began to push for its share of the American market, its officials determined that the best way to remove the apprehension about this foreign product was to take the dealer to Germany and have him see his investment first-hand. It was believed that once the dealer saw the manufacturing facilities and the stability of the ‘new Germany’ he would be convinced that VW was for him. [footnote omitted] Furthermore, VW considered the expenditure justified because the dealer was being asked to make a substantial investment of his time and money in a comparatively new product. Indeed, after taking the trip, VW required him to acquire first-class facilities. ... VW could not have asked that this upgrading be done unless it convinced the dealer that VW was here to stay. Apparently these trips have paid off since VW’s sales have skyrocketed and the dealers have made their facilities top-rate operations under the VW requirements for a standard dealership.
The activities in Germany support the conclusion that the trip was oriented to business. The Government makes much of the fact that the travel brochure allocated only two of the twelve days to the touring of VW factories. This argument ignores the uncontradicted evidence that not all of the planned activities were in the brochure. There is ample support for the trial judge’s finding that a substantial amount of time was spent touring VW facilities and visiting local dealerships. VW had set up these tours with local dealers so that the travelers could discuss how the facilities were operated in Germany. Mr. Gotcher took full advantage of this opportunity and even used some of his ‘free time’ to visit various local dealerships. Moreover, at almost all of the evening meals VW officials gave talks about the organization and passed out literature and brochures on the VW story.
Some of the days were not related to touring VW facilities, but that fact alone cannot be decisive. The dominant purpose of the trip is the critical inquiry and some pleasurable features will not negate the finding of an overall business purpose. [citation omitted] Since we are convinced that the agenda related primarily to business and that Mr. Gotcher’s attendance was prompted by business considerations, the so-called sightseeing complained of by the Government is inconsequential. [citation omitted] Indeed, the district court found that even this touring of the countryside had an indirect relation to the business since the tours were not typical sightseeing excursions but were connected to the desire of VW that the dealers be persuaded that the German economy was stable enough to justify investment in a German product. We cannot say that this conclusion is clearly erroneous. Nor can we say that the enthusiastic literary style of the brochures negates a dominant business purpose. It is the business reality of the total situation, not the colorful expressions in the literature, that controls. Considering the record, the circumstances prompting the trip, and the objective achieved, we conclude that the primary purpose of the trip was to induce Mr. Gotcher to take out a VW dealership interest.
The question, therefore, is what tax consequences should follow from an expense-paid trip that primarily benefits the party paying for the trip. In several analogous situations the value of items received by employees has been excluded from gross income when these items were primarily for the benefit of the employer. Section 119 excludes from gross income of an employee the value of meals and lodging furnished to him for the convenience of the employer. Even if these items were excluded by the 1954 Code, the Treasury and the courts recognized that they should be excluded from gross income. [footnote omitted] Thus it appears that the value of any trip that is paid by the employer or by a businessman primarily for his own benefit should be excluded from gross income of the payee on similar reasoning. [citations omitted]
In the recent case of Allen J. McDonnell, 26 T.C.M. 115, Tax Ct. Mem. 1967-68, a sales supervisor and his wife were chosen by lot to accompany a group of contest winners on an expense-paid trip to Hawaii. In holding that the taxpayer had received no income, the Tax Court noted that he was required by his employer to go and that he was serving a legitimate business purpose though he enjoyed the trip. The decision suggests that in analyzing the tax consequences of an expense-paid trip one important factor is whether the traveler had any choice but to go. Here, although the taxpayer was not forced to go, there is no doubt that in the reality of the business world he had no real choice. The trial judge reached the same conclusion. He found that the invitation did not specifically order the dealers to go, but that as a practical matter it was an order or directive that if a person was going to be a VW dealer, sound business judgment necessitated his accepting the offer of corporate hospitality. So far as Economy Motors was concerned, Mr. Gotcher knew that if he was going to be a part-owner of the dealership, he had better do all that was required to foster good business relations with VW. Besides having no choice but to go, he had no control over the schedule or the money spent. VW did all the planning. In cases involving noncompensatory economic gains, courts have emphasized that the taxpayer still had complete dominion and control over the money to use it as he wished to satisfy personal desires or needs. Indeed, the Supreme Court has defined income as accessions of wealth over which the taxpayer has complete control. Commissioner of Internal Revenue v. Glenshaw Glass Co., supra. Clearly, the lack of control works in the taxpayer’s favor here.
McDonnell also suggests that one does not realize taxable income when he is serving a legitimate business purpose of the party paying the expenses. The cases involving corporate officials who have traveled or entertained clients at the company’s expense are apposite. Indeed, corporate executives have been furnished yachts, Challenge Mfg. Co. v. Commissioner, 1962, 37 T.C. 650, taken safaris as part of an advertising scheme, Sanitary Farms Dairy, Inc., 1955 25 T.C. 463, and investigated business ventures abroad, but have been held accountable for expenses paid only when the court was persuaded that the expenditure was primarily for the officer’s personal pleasure. [footnote omitted] On the other hand, when it has been shown that the expenses were paid to effectuate a legitimate corporate end and not to benefit the officer personally, the officer has not been taxed though he enjoyed and benefited from the activity. [footnote omitted] Thus, the rule is that the economic benefit will be taxable to the recipient only when the payment of expenses serves no legitimate corporate purposes. [citation omitted] The decisions also indicate that the tax consequences are to be determined by looking to the primary purpose of the expenses and that the first consideration is the intention of the payor. The Government in argument before the district court agreed that whether the expenses were income to taxpayers is mainly a question of the motives of the people giving the trip. Since this is a matter of proof, the resolution of the tax question really depends on whether Gotcher showed that his presence served a legitimate corporate purpose and that no appreciable amount of time was spent for his personal benefit and enjoyment. [citation omitted]
Examination of the record convinces us that the personal benefit to Gotcher was clearly subordinate to the concrete benefits to VW. The purpose of the trip was to push VW in America and to get dealers to invest more money and time in their dealerships. Thus, although Gotcher got some ideas that helped him become a better dealer, there is no evidence that this was the primary purpose of the trip. Put another way, this trip was not given as a pleasurable excursion through Germany or as a means of teaching taxpayer the skills of selling. The personal benefits and pleasure were incidental to the dominant purpose of improving VW’s position on the American market and getting people to invest money.
The corporate-executive decisions indicate that some economic gains, though not specifically excluded from § 61, may nevertheless escape taxation. They may be excluded even though the entertainment and travel unquestionably give enjoyment to the taxpayer and produce indirect economic gains. When this indirect economic gain is subordinate to an overall business purpose, the recipient is not taxed. We are convinced that the personal benefit to Mr. Gotcher from the trip was merely incidental to VW’s sales campaign.
As for Mrs. Gotcher, the trip was primarily vacation. She did not make the tours with her husband to see the local dealers or attend discussions about the VW organization. This being so, the primary benefit of the expense-paid trip for the wife went to Mr. Gotcher in that he was relieved of her expenses. He should therefore be taxed on the expenses attributable to his wife. [citation omitted] Nor are the expenses deductible since the wife’s presence served no bona fide business purpose for her husband. Only when the wife’s presence is necessary to the conduct of the husband’s business are her expenses deductible under § 162. [citation omitted] Also, it must be shown that the wife made the trip only to assist her husband in his business. ...
Affirmed in part; reversed in part.
JOHN R. BROWN, Chief Judge (concurring):
Attributing income to the little wife who was neither an employee, a prospective employee, nor a dealer, for the value of the trip she neither planned nor chose still bothers me. If her uncle had paid for the trip, would it not have been a pure gift, not income? Or had her husband out of pure separate property given her the trip would the amount over and above the cost of Texas bed and board have been income? I acquiesce now, confident that for others in future cases on a full record the wife, as now does the husband, also will overcome.
Taxability of a Price Reduction
What happens when taxpayer is able to purchase a computer that “normally” retails for $1000 for $800 during a “computer blowout sale?” Does our taxpayer enjoy a $200 accession to wealth? Answer: No.
A “mere reduction in price” is not taxable income. A contrary rule would raise insurmountable problems of value determination. Recall the alternative definitions of “value” in chapter 1. Perhaps an insufficient number of persons were willing to pay $1000 for the computer $800 in the first place.
Notes and Questions:
1. What tests does the court state to determine whether the trip was an “accession to wealth?”
2. If the procurement of a benefit “primarily benefits” the payor rather than the recipient, has the recipient really realized an “accession to wealth” whose value should be measured by its cost?
3. How important should the absence of control over how money is spent be in determining whether taxpayer has realized an accession to wealth on which s/he should pay taxes? What factors are important in determining whether a non-compensatory benefit is an “accession to wealth?”
4. Is Gotcher a case where taxpayer did not receive any “gross income” or a case where taxpayer did receive “gross income” that the Code excluded? It might make a difference.
- What happened to our second principle – that all income is taxed once unless an exception is specifically found in the Code?
5. Can you think of any reasons other than those offered by Judge Brown for not including the cost of Mrs. Gotcher’s trip in Mr. Gotcher’s gross income? How does (can) her trip fit within the rationale that excludes the value of Mr. Gotcher’s trip from his gross income?
- Does Judge Brown’s analysis support his conclusion?
6. This case involved a prospective investor. The recipient may also be a prospective employee or a prospective customer.
7. Back to windfalls, plus some dumb luck ...
Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969)
YOUNG, District Judge.
… Plaintiffs are husband and wife, and live within the jurisdiction of the United States District Court for the Northern District of Ohio. In 1957, the plaintiffs purchased a used piano at an auction sale for approximately $15.00, and the piano was used by their daughter for piano lessons. In 1964, while cleaning the piano, plaintiffs discovered the sum of $4,467.00 in old currency, and since have retained the piano instead of discarding it as previously planned. Being unable to ascertain who put the money there, plaintiffs exchanged the old currency for new at a bank, and reported a sum of $4,467.00 on their 1964 joint income tax return as ordinary income from other sources. On October 18, 1965, plaintiffs filed an amended return …, this second return eliminating the sum of $4,467.00 from the gross income computation, and requesting a refund in the amount of $836.51, the amount allegedly overpaid as a result of the former inclusion of $4,467.00 in the original return for the calendar year of 1964. … [T]he Commissioner of Internal Revenue rejected taxpayers’ refund claim in its entirety, and plaintiffs filed the instant action in March of 1967.
Plaintiffs make three alternative contentions in support of their claim that the sum of $836.51 should be refunded to them. First, that the $4,467.00 found in the piano is not includable in gross income under § 61 of the Internal Revenue Code. (26 U.S.C. § 61) Secondly, even if the retention of the cash constitutes a realization of ordinary income under § 61, it was due and owing in the year the piano was purchased, 1957, and by 1964, the statute of limitations provided by 26 U.S.C. § 6501 had elapsed. And thirdly, that if the treasure trove money is gross income for the year 1964, it was entitled to capital gains treatment under § 1221 of Title 26. The Government, by its answer and its trial brief, asserts that the amount found in the piano is includable in gross income under § 61(a) of Title 26, U.S.C., that the money is taxable in the year it was actually found, 1964, and that the sum is properly taxable at ordinary income rates, not being entitled to capital gains treatment under 26 U.S.C. §§ 2201 et seq.
... This Court has concluded that the taxpayers are not entitled to a refund of the amount requested, nor are they entitled to capital gains treatment on the income item at issue.
The starting point in determining whether an item is to be included in gross income is, of course, § 61(a) ..., and that section provides in part: “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:” * * *’
Subsections (1) through (15) of § 61(a) then go on to list fifteen items specifically included in the computation of the taxpayers’ gross income, and Part II of Subchapter B of the 1954 Code (§§ 71 et seq.) deals with other items expressly included in gross income. While neither of these listings expressly includes the type of income which is at issue in the case at bar, Part III of Subchapter B (§§ 101 et seq.) deals with items specifically excluded from gross income, and found money is not listed in those sections either. This absence of express mention in any code sections necessitates a return to the ‘all income from whatever source’ language of § 61(a) of the code, and the express statement there that gross income is ‘not limited to’ the following fifteen examples. …
The decisions of the United States Supreme Court have frequently stated that this broad all-inclusive language was used by Congress to exert the full measure of its taxing power under the Sixteenth Amendment to the United States Constitution. [citations omitted]
In addition, the Government in the instant case cites and relies upon an I.R.S. Revenue Ruling which is undeniably on point:
‘The finder of treasure-trove is in receipt of taxable income, for Federal income tax purposes, to the extent of its value in United States Currency, for the taxable year in which it is reduced to undisputed possession.’ Rev. Rul. 61, 1953-1, Cum. Bull. 17.
… While it is generally true that revenue rulings may be disregarded by the courts if in conflict with the code and the regulations, or with other judicial decisions, plaintiffs in the instant case have been unable to point to any inconsistency between the gross income sections of the code, the interpretation of them by the regulations and the Courts, and the revenue ruling which they herein attack as inapplicable. On the other hand, the United States has shown consistency in the letter and spirit between the ruling and the code, regulations, and court decisions.
Although not cited by either party, and noticeably absent from the Government’s brief, the following Treasury Regulation appears in the 1964 Regulations, the year of the return in dispute:
‘§ 1.61-14 Miscellaneous items of gross income.
‘(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income * * *. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.’
… This Court is of the opinion that Treas. Reg. § 1.61-14(a) is dispositive of the major issue in this case if the $4,467.00 found in the piano was ‘reduced to undisputed possession’ in the year petitioners reported it, for this Regulation was applicable to returns filed in the calendar year of 1964.
This brings the Court to the second contention of the plaintiffs: that if any tax was due, it was in 1957 when the piano was purchased, and by 1964 the Government was blocked from collecting it by reason of the statute of limitations. Without reaching the question of whether the voluntary payment in 1964 constituted a waiver on the part of the taxpayers, this Court finds that the $4,467.00 sum was properly included in gross income for the calendar year of 1964. Problems of when title vests, or when possession is complete in the field of federal taxation, in the absence of definitive federal legislation on the subject, are ordinarily determined by reference to the law of the state in which the taxpayer resides, or where the property around which the dispute centers in located. Since both the taxpayers and the property in question are found within the State of Ohio, Ohio law must govern as to when the found money was ‘reduced to undisputed possession’ within the meaning of Treas. Reg. 1.61- 14 and Rev. Rul. 61-53-1, Cum. Bull. 17.
In Ohio, there is no statute specifically dealing with the rights of owners and finders of treasure trove, and in the absence of such a statute the common-law rule of England applies, so that ‘title belongs to the finder as against all the world except the true owner.’ Niederlehner v. Weatherly, 78 Ohio App. 263, 29 N.E.2d 787 (1946), appeal dismissed, 146 Ohio St. 697, 67 N.E.2d 713 (1946). The Niederlehner case held, inter alia, that the owner of real estate upon which money is found does not have title against the finder. Therefore, in the instant case if plaintiffs had resold the piano in 1958, not knowing of the money within it, they later would not be able to succeed in an action against the purchaser who did discover it. Under Ohio law, the plaintiffs must have actually found the money to have superior title over all but the true owner, and they did not discover the old currency until 1964. Unless there is present a specific state statute to the contrary, [footnote omitted] the majority of jurisdictions are in accord with the Ohio rule. [footnote omitted] Therefore, this Court finds that the $4,467.00 in old currency was not ‘reduced to undisputed possession’ until its actual discovery in 1964, and thus the United States was not barred by the statute of limitations from collecting the $836.51 in tax during that year.
Finally, plaintiffs’ contention that they are entitled to capital gains treatment upon the discovered money must be rejected. [Taxpayers’ gain did not result from the sale or exchange of a capital asset.] …
Notes and Questions:
1. How did the court treat Rev. Rul. 1953-1? What does this tell you about the legal status of a revenue ruling?
2. What role did state law play in the resolution of this case? Why was it necessary to invoke it?
3. What tax norms would the court have violated if it had held in favor of the Cesarinis?
Other statutory items of gross income
Recall from chapter 1 that the Code specifically names items of gross income in §§ 71-90. You should at least peruse the table of contents to your Code to get an idea of what Congress has deemed worthy of specific inclusion. We will take up some of these provisions in a bit more depth. These Code sections often define the precise extent to which an item is (and so implicitly the extent which it is not) gross income. Sometimes Congress is clarifying or stating a position on a point on which courts had previously ruled otherwise. For example:
Prizes and Awards:
Read § 74(a). With only the exceptions noted in §§ 74(b and c), gross income includes amounts received as prizes and awards. A significant question with regard to non-cash prizes is their valuation. For reasons you can readily determine, valuation must be an objective matter. However, this does not mean that the fmv of a prize to the recipient is necessarily the price paid by the giver. For example, most persons would agree that merely driving a new automobile from the dealer’s lot substantially reduces its value. The winner of an automobile should be given at least some credit for this fact. See McCoy v. CIR, 38 T.C. 841 (1962) (prize of automobile). Taxpayer might demonstrate the value that she or he places on the prize by trading it as quickly as possible after receiving it for something she or he values more – in economic terms, a “revealed preference.” See McCoy, supra (taxpayer traded automobile for $1000 cash plus a different new automobile); Turner v. CIR, T.C. Memo. 1954-38 (taxpayer exchanged two first-class steamship tickets for four tourist class tickets).