MOORE ET UX. v. UNITED STATES
Year:
Court:
2. Disposition:
3. Holding: the MRT does not exceed Congress’s constitutional authority.
4. Issue:
5. Procedural History: The District Court dismissed the suit, and the Ninth Circuit affirmed.
6. Facts: petitioners Charles and Kathleen Moore invested in the American-controlled foreign corporation KisanKraft. From 2006 to 2017, KisanKraft generated a great deal of income but did not distribute that income to its American shareholders.
The Moores paid the tax and then sued for a refund, claiming, among other things, that the MRT violated the Direct Tax Clause of the Constitution because, in their view, the MRT was an unapportioned direct tax on their shares of KisanKraft stock.
7. Rule:
8. Reasoning: Some entities, such as S corporations and partnerships, are taxed on a pass-through basis, where the entity itself does not pay taxes. Instead, the entity’s income is attributed to the shareholders or partners, who then pay taxes on that income even if the entity has not distributed any money or property to them.
Other business entities do pay taxes directly on their income. Those entities’ shareholders ordinarily are not taxed on that income but are taxed when the entity distributes a dividend or when the shareholder sells shares.
In 2017, Congress passed the Tax Cuts and Jobs Act. As relevant here, Congress imposed a one-time, backwardlooking, pass-through tax on some American shareholders of American-controlled foreign corporations to address the trillions of dollars of undistributed income that had been accumulated by those foreign corporations over the years. (Mandatory Repatriation Tax)
The Moores contend that the MRT is a tax on property and that the tax is therefore unconstitutional because it is not apportioned. Income, the Moores argue, requires realization, and the MRT does not tax any income that they have realized.
when dealing with an entity’s undistributed income, Congress may either tax the entity or tax its shareholders or partners. Whichever method Congress chooses, this Court has held that the tax remains a tax on income.
the Moores argue that taxes on partnerships are distinguishable from the MRT and not controlled by precedent because partnerships are not separate entities from their partners. -> incorrect; The federal and state treated partnerships as separate legal entities for tax purposes.
the Moores argue that taxes on S corporations are distinguishable from the MRT because shareholders of S corporations choose to be taxed directly on corporation income. -> consent cannot explain Congress’s authority to tax the shareholders of S corporations directly on corporate income.
The Moores argue that those laws apply “the doctrine of constructive realization.”
the Sixteenth Amendment expressly confirmed what had been the understanding of the Constitution before Pollock: Taxes on income—including taxes on income from property—are indirect taxes that need not be apportioned. Meanwhile, property taxes remain direct taxes that must be apportioned.
Crane v. Commissioner
Year: 1947
Court:
2. Disposition: Affirmed.
3. Holding: the petitioner realized $257500 on the sale of this property, $2500 net cash received plus $255000 loan principal assumed.
4. Issue:
5. Procedural History: the Court found the basis as $262042.
6. Facts: Crane inherited a building from her husband. The building was appraised at $262042 and was encumbered by a mortgage of $262042, with $255000 in principal and $7042 in past-due interest. Crane sold the building for $3000 subject to the existing mortgage. She paid the expenses of sale of $500 and calculated her gain as $2500. She argued that she inherited no more than the property’s equity of $0 minus encumbering debt of $262042. She concluded that she inherited nothing and ignored the fact that the purchaser took the building subject to the outstanding mortgage.
7. Rule:
8. Reasoning: 1001(b) defines the amount realized as the sum of any money received plus the fair market value of the property other than money received and 1001(a) defines the gain on the sale as the excess of the amount realized over the basis.
The amount of the mortgage is properly included in the amount realized on the sale.
A mortgagor, not personally liable on the debt, who sells the property subject to the mortgage and for additional consideration realizes a benefit in the amount of the mortgage as well as the consideration.
If he 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.
Commissioner v. Glenshaw Glass Co.
Year: 1955
Court:
2. Disposition: Reversed.
3. Holding: It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable but not the additional amount extracted as punishment for the same conduct which caused the injury.
4. Issue: whether money received as exemplary damages for fraud or as the punitive 2/3 portion of a treble-damage antitrust recovery must be reported by a taxpayer as gross income.
5. Procedural History: The Court of Appeals affirmed the Tax’s Court’s ruling in favor of the taxpayers.
6. Facts: Glenshaw manufactures glass bottles and containers and was engaged in litigation with Hartford. Glenshaw demanded exemplary damages for fraud and treble damages for injury to its business by reason of Hartford’s violation of the antitrust laws. Hartford settled and paid $800000 and $324529 represented punitive damages. Glenshaw did not report this portion of the settlement as income.
7. Rule:
8. Reasoning: respondents assert that punitive damages are not within the scope of section 61(a). -> Congress applied no limitations as to the source of taxable receipts nor restrictive labels as to their nature.
Respondents contend that a narrower reading of 61(a) is required as the gain derived from capital, from labor, or from both combined -> the definition was not meant to provide a touchstone to all future gross income questions.
Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. (definition of income)
Cesarini v. UNITED STATES
Year: 1970
Court:
2. Disposition:
3. Holding: the old currency was not reduced to undisputed possession until its actual discovery in 1964, and thus the US was not barred by the statute of limitations from collecting the tax.
4. Issue:
5. Procedural History:
6. Facts: The Cesarinis (plaintiffs) purchased a used piano at an auction in 1957. In 1964, they discovered $4,467.00 in cash hidden inside the piano. They reported the sum as income in their 1964 income tax return. In 1965, they filed an amended income tax return, in which they removed the sum of $4,467.00 and requested a refund of the $836.51 in taxes they paid for the found money. The Commissioner of Internal Revenue refused to refund the money and the Cesarinis filed suit in this court.
7. Rule:
8. Reasoning: income from all sources is taxed unless the taxpayer can point to an express exemption. Taxpayers failed to list a specific exclusion and the government has pointed to express language covering the found money.
IRC does not take on every legal issue. Problems of when title vests… are ordinarily determined by reference to the law of the state in which the taxpayer resides.
Hamilton v. Commissioner
Year: 2020
Court:
2. Disposition: affirm.
3. Holding: Mr. Hamilton, with Mrs. Hamilton acting as his agent, exercised effective control over these funds. Sustain the Notice of Deficiency.
4. Issue:
5. Procedural History: the Tax Court applied substance over form and sustained the Notice and sustained the late-filing penalties.
6. Facts: Mr. Hamilton borrowed more than $150000 to pay costs of school in 2008. Mrs. Hamilton successfully discharged the student loan in 2011. Mr. Hamilton received $300000 as a non-taxable distribution from his partnership in 2011. Mrs. Hamilton transferred these funds into a savings account held by their son. She withdrew $120000 to finance household expenses. They filed a return in 2014 with $850000 in liabilities and $680000 in assets but did not mention the savings account fund. Mr. Hamilton self-identified as insolvent. The Commissioner filed a Notice of Deficiency.
7. Rule:
8. Reasoning: a transferor continued to retain significant control over the property transferred.
McCormick v. Commissioner
Year: 2009
Court:
2. Disposition:
3. Holding: The amount of cancellation of indebtedness income from CitiFinancial is $49.66. They have no cancellation of indebtedness income from Chase.
4. Issue:
5. Procedural History:
6. Facts: McCormick was advised that the loan amount was $8042.1 for CitiFinancial. McCormick challenged amount, claiming that an insurance refund of $492.44 should be credited. The manager offered to settle for $7500 and McCormick accepted. McCormick’s credit card debt was placed with collection agencies in 2001. McCormick disputed the account in 2002. In 2005, McCormick offered to pay $1000 as the amount actually owed. Chase accepted.
7. Rule:
8. Reasoning: to determine the amount of cancellation of indebtedness income properly attributed to McCormick, we must determine the amount of the CitiFinancial and Chase debt that was definite and liquidated.
If a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return and has fully cooperated, the Commissioner shall have the burden of producing reasonable and probative information. Petitioners have asserted reasonable disputes.
Gates v. Commissioner
Year: 2010
Court:
2. Disposition:
3. Holding: petitioners may not exclude from income under section 121(a) the gain realized on the sale of the Summit Road property.
4. Issue: (1) whether petitioners may exclude from gross income $500000 of gain from the sale in 2000 of property on Summit Road, under section 121(a); and (2) whether petitioners are liable for the section 6651(a)(1) addition to tax.
5. Procedural History:
6. Facts: Gates (plaintiffs) completely demolished a house that they used as their principal residence. The Gateses then built, but never occupied, a new house on the same property. Later, the Gateses realized a large gain on the sale of the property. The Gateses claimed that they were entitled by statute to exclude this gain from their gross income because the original house had been their principal residence for long enough to qualify the Gateses for an exclusion for the sale of their principal residence.
7. Rule:
8. Reasoning: Section 121(a) allows a taxpayer to exclude from income gain on the sale or exchange of property if the taxpayer has owned and used such property as his or her principal residence for at least 2 of the 5 years immediately preceding the sale.
Respondents interpret the term property to mean a dwelling that was owned and occupied by the taxpayer as his principal residence for at least 2 of the 5 years; that because petitioners never resided in the new house, the new house was never petitioners’ principal residence.
Petitioners contend that the term property includes not only the dwelling but also the land on which the dwelling is situated.
Principal residence may mean the chief or primary place where a person lives or the chief or primary dwelling in which a person resides. Property may mean a parcel of real estate or dwelling.
The legislative history supports that Congress intended the terms property and principal residence to mean a house or other dwelling unit in which the taxpayer actually resided.
Halpern dissenting: the Supreme Court said if the meaning of a tax provision liberalizing the law from motives of public policy is doubtful, then it should not be narrowly construed. I would treat demolition and reconstruction the same as a renovation.
Commissioner v. Duberstein
Year: 1960
Court:
2. Disposition: Reversed.
3. Holding: despite the characterization of the transfer of the Cadillac by the parties and absence of any obligation, even of a moral nature, to make it, it was at bottom a recompense for Duberstein’s past services or an inducement for him to be of further service in the future.
4. Issue:
5. Procedural History: Duberstein sued, and the tax court ruled that the car was not a gift. The Sixth Circuit reversed, finding the car was a gift.
6. Facts: Mose Duberstein (plaintiff) ran a company and sometimes gave customer leads to Morris Berman, who ran a similar company. After seven years, Berman gave Duberstein a new Cadillac, saying that it was because Duberstein’s customer leads had been so helpful. Berman’s business deducted the car’s value as a business expense on its taxes. Duberstein considered the car a gift and not income. The commissioner of the Internal Revenue Service (commissioner) (defendant) determined that the car was income, not a gift, and that Duberstein owed additional taxes.
7. Rule:
8. Reasoning: A gift in the statutory sense proceeds from a detached and disinterested generosity, or out of affection, respect, admiration, charity or like impulses.
The donor’s characterization of his action is not determinative – that there must be an objective inquiry as to whether what is called a gift amounts to it in reality.
The proper criterion is one that inquires what the basic reason for his conduct was in fact – the dominant reason that explains his action in making the transfer.
Goodwin v. United States
Year: 1995
Court:
2. Disposition: Affirmed.
3. Holding: the congregation as a whole made special occasion gifts on account of Goodwin’s on going services as pastor of the Church. No jury could conclude that these payments were excludable.
4. Issue:
5. Procedural History: the district court granted summary judgment for the government.
6. Facts: Goodwin and his wife (plaintiff) regularly received substantial payments from the church, which often essentially doubled the relatively low amount of Goodwin’s church salary. These substantial payments were financed by the anonymous donations of individual church members and were collected several times a year by church leaders, who were acting in accord with formal procedures they had established. The payments were donated on behalf of the entire church. Individual donors did not take charitable-tax deductions for their donations, and the Goodwins did not report the donations as taxable income. The commissioner of the Internal Revenue Service determined that the payments constituted income to the Goodwins, and issued a deficiency notice for the amount of those payments.
7. Rule:
8. Reasoning: unless the Goodwins can prove that the special occasion gifts fall within the statutory exclusion for gifts, these payments are taxable income.
The government urges to adopt the test that: since the transfers were tied to the performance of services by taxpayer, they were, as a matter of law, compensation. -> far too broad.
The Goodwins argue that the special occasion gifts were made out of love, admiration, and respect. -> special occasion gifts were made by the congregation as a whole through a routinized, highly structured program. Viewing the question of transferor intent from this perspective makes it clear that the payments were taxable income to the Goodwins.
Wolder v. Commissioner
Year: 1974
Court:
2. Disposition: Judgment in the appeal of Wolder affirmed. Judgment in the cross-appeal of the Commissioner reversed and remanded.
3. Holding:
4. Issue:
5. Procedural History: The Tax Court held that the fair market value of the shares and the $15,845 was taxable income for services rendered, and not a bequest exempt from taxation. The Tax Court held that the stock and cash received were constructively received by the taxpayer in 1965, the year of the death of the client, rather than 1966 the year the individual taxpayers actually received them.
6. Facts: Around October 3, 1947, Victor R. Wolder (defendant) and Marguerite K. Boyce entered an agreement. The agreement specified that Wolder, an attorney, would provide legal services for Boyce free of charge for the rest of her life. In return, Boyce would bequeath any securities she might obtain should a corporation by the name of White Laboratories undergo a merger or consolidation. White Laboratories subsequently merged with Schering Corporation. Boyce received 750 shares of one type of stock and 500 shares of another. Boyce later exchanged the 500 shares for $15,845. Over the course of Boyce’s life, Wolder upheld the agreement by providing legal services without charge. Boyce also upheld the agreement by bequeathing to Wolder her 750 shares and the $15,845. Wolder and Manufacturers were appointed coexecutors on September 17, 1965 and Wolder received the money on November 22, 1966.
7. Rule:
8. Reasoning: Mrs. Boyce’s contract was one for the postponed payment of legal services.
A transfer in the form of a bequest was the method that the parties chose to compensate Mr. Wolder for his legal services, and that transfer is therefore subject to taxation whatever its label whether by federal or by local law may be.
The key inquiry is whether in fact he had the stock readily available to him in 1965 subject to his unfettered command. Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. The basic test of constructive receipt was not met: the income was not unqualifiedly subject to the demand of the cash basis taxpayer.
Amos v. Commissioner
Year: 2003
Court:
2. Disposition:
3. Holding: Rodman paid $120000 on account of petitioner’s claimed physical injuries and $80000 on account of the nonphysical injury provisions in the settlement agreement. Include in his gross income $80000 of that amount.
4. Issue:
5. Procedural History:
6. Facts: Amos (plaintiff) was working as a cameraman at a professional basketball game. During the game, Dennis Rodman, one of the players, fell onto Amos and kicked him in the groin. Amos sought the advice of a lawyer and reached a settlement with Rodman. Under the settlement agreement, Amos was to receive $200,000 for the release of any claims that he had against Rodman. Amos excluded the $200,000 settlement payment from his gross income. Respondent determined that petitioner is not entitled to exclude from his gross income the settlement amount at issue.
7. Rule:
8. Reasoning: Section 104(a)(2) provides that gross income does not include the amount of damages received.
Two independent requirements for 104(a)(2): first, the underlying cause of action giving rise to the recovery is based upon tort or tort type rights and second, the damages were received on account of personal injuries or sickness.
Petitioner contends the entire amount is on account of the physical injuries that he claimed he sustained as a result of the incident.
Respondent counters that the settlement amount is includable in petitioner’s gross income because petitioner failed to introduce into evidence the extent of petitioner’s physical injuries as a result of the incident. -> reject.
Because the amount of liquidated damages is equal to the settlement amount, Rodman, did not intend to pay the settlement amount to compensate for physical injuries. -> not determinative.
Rodman’s dominant reason in paying the settlement amount was to compensate for physical injuries. The settlement agreement does not specify the portion for physical injuries and for nonphysical injury provisions in the settlement agreement.
Devine v. Commissioner
Year: 2017
Court:
2. Disposition:
3. Holding: petitioner has not carried her burden of proving that any portion of the settlement proceeds was paid on account of physical injury. The payment was includible in full.
4. Issue: whether petitioners may exclude from gross income under section 104(a)(2), as damages received on account of personal physical injuries or physical sickness, proceeds that Devine received under a settlement agreement.
5. Procedural History:
6. Facts: Devine worked as a civilian aircraft technician by the National Guard. She became the target of sexual harassment, gender discrimination, pregnancy related discrimination, and reprisal. The National Guard accepted a settlement offer to resolve claims in exchange for payment of $225000 plus attorney’s fees. Petitioners did not report any income from the settlement.
7. Rule:
8. Reasoning: When damages are received under a settlement agreement, the nature of the claim that was the actual basis for the settlement determines whether the damages are excludable under section 104(a)(2). The nature of the claim is typically determined by reference to the terms of the agreement.
In neither case did petitioner allege any actual physical injury or demand compensation for any physical injury.
Beckett v. Commissioner
Year: 2020
Court:
2. Disposition:
3. Holding: one third of petitioner’s $19000 settlement payment is excluded from income under section 104(a)(2).
4. Issue:
5. Procedural History:
6. Facts: Backett was employed by Genesis Multi-Medical Center as a certified nursing assistant. Petitioner suffered from seizures. Petitioner brought suit claiming wrongful termination because of epilepsy and the company’s failure to provide a reasonable accommodation. Petitioner signed a settlement to end the suit for $28000. Petitioner freported as income the $1000 back pay but not $19000 for claims or $8000 for lawyer’s fee. Respondent issued a notice of deficiency for $27000.
7. Rule:
8. Reasoning: For the payment to fall under section 104(a)(2), petitioner must show a direct causal link between the damages received and the physical injury or sickness sustained.
The settlement agreement explicitly states that the compensatory damages were paid in part for physical distress and damages.
Settlement identifies three bases for the $19000 settlement payment: “emotional distress,” “pain and suffering,” and “physical distress and damages.”
Benaglia v. Commissioner
Year: 1937
Court:
2. Disposition: Reversed.
3. Holding: Under such circumstances, the value of meals and lodging is not income to the employee.
4. Issue:
5. Procedural History:
6. Facts: the petitioner has been employed as the manager in full charge of the several hotels in Honolulu. Petitioner and his wife occupied a suite of rooms in the Hotel and received their meals at and from the hotel. The Commissioner added $7845 each year to the petitioner’s gross income as the fair market value of rooms and meals.
7. Rule:
8. Reasoning: the petitioner’s residence at the hotel was because he could not otherwise perform the services required of him. His duty was continuous and required his presence at a moment’s call.
The occupation of the premises was imposed upon him for the convenience of the employer.
Revenue ruling 2003-57
Year:
Court:
2. Disposition:
3. Holding: Amounts paid for breast reconstruction surgery following a mastectomy for cancer and for vision correction surgery are medical care expenses under 213(d). Amounts paid by individuals to whiten teeth are not.
4. Issue: are amount paid by individuals for breast reconstruction surgery, vision correction surgery, and teeth whitening medical care expenses within the meaning of 213(d) and deductible under 213 of the IRC?
5. Procedural History:
6. Facts:
7. Rule: 213(a) allows for deduction for expenses paid during the taxable year not compensated for by insurance or otherwise, for medical care of the taxpayer, spouse, or dependent, to the extent the expenses exceed 7.5 percent of AGI. Under 213(d)(1)(A), medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.
8. Reasoning: A’s cancer is a disfiguring disease because the treatment results in the loss of breast. The cost of B’s laser eye surgery is allowed under 213(d)(9) because the surgery is a procedure that meaningfully promotes the proper function of the body. The teeth whitening procedure is directed at improving C’s appearance.
Private Letter Ruling 200318017
Year: 2003
Court:
2. Disposition:
3. Holding: the unreimbursed expenses for the egg donor fee, the agency fee, the donor’s medical and psychological testing, the insurance for post-procedure donor assistance, and the legal fees for preparation of the contract are medical care expenses that are deductible under 213.
4. Issue:
5. Procedural History:
6. Facts:
7. Rule: legal expenses may be deductible as medical expenses under 213 if there is a direct or proximate relationship between the legal expenses and the provision of medical care to a taxpayer.
8. Reasoning: these costs are preparatory to the performance of your own medical procedure.
Magdalin v. Commissioner
Year: 2008
Court:
2. Disposition:
3. Holding: he cannot deduct those expenses because he has no medical condition or defect to which those expenses relate and because they did not affect a structure or function of his body.
4. Issue:
5. Procedural History:
6. Facts: In 2005, William Magdalin became father to a baby born via in vitro fertilization (IVF) using an egg donor and gestational carrier. In 2006, Magdalin became father to a second baby born via IVF using the same processes. At all times, Magdalin had normal reproductive capabilities. Magdalin previously had twin boys with his former wife without the assistance of IVF. On his income tax returns for 2004 and 2005, Magdalin deducted a majority of those amounts as medical-care expenses.
7. Rule:
8. Reasoning: we have interpreted the statute as requiring a causal relationship in the form of a but for test between a medical condition and the expenditures incurred in treating that condition. The but for test requires petitioner to prove that the expenditures were an essential element of the treatment and that they would not have otherwise been incurred for nonmedical reasons.
Petitioner argues that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men how to reproduce. Respondent argues that petitioner had no physical or mental defect or illness which prohibited him from procreating naturally and the procedure was not medically indicated.
None of the expenses at issue was incurred primarily for the prevention nor alleviation of a physical or mental defect or illness.
Voss v. Commissioner
Year: 2015
Court:
2. Disposition: reverse and remand.
3. Holding: 163(h)’s debt limits apply per taxpayer. Congress implied that unmarried co-owners filing separate returns are entitled to deduct interest on up to $1.1 million of home debt each.
4. Issue:
5. Procedural History: The tax court affirmed the IRS’s determination. Voss and Sophy appealed.
6. Facts: Bruce Voss and Charles Sophy (plaintiffs) were not married but owned a house together. For their 2006 and 2007 tax returns, Voss and Sophy each claimed a mortgage interest deduction under section 163(h)(3) of the Internal Revenue Code. Section 163(h)(3) placed a $1.1 million limit on the amount of home-related debt on which a taxpayer could claim a deduction. The IRS audited Voss and Sophy and determined that as co-owners of the house they were jointly subject to the $1.1 million limit.
7. Rule:
8. Reasoning: both debt limit provisions contain a parenthetical that speaks to one common situation of co-ownership: married individuals filing separate return.
It suggests that the parentheticals contain an exception to the general debt limit set out in the main clause.
The phrase “in the case of” and “aggregate amount treated” is understood in a per-taxpayer manner. The parentheticals’ lower limits apply per spouse. The parentheticals give each separately filing spouse half the debt limit – the parentheticals do something.
The Congress eliminated what would otherwise be a significant discrepancy between separately filing and jointly filing married couples by expressly reducing the debt limits for spouses filing separately.
Welch v. Helvering
Year: 1933
Court:
2. Disposition: Affirmed.
3. Holding: unless we can say from facts within our knowledge that these are ordinary and necessary expenses according to the ways of conduct and the forms of speech prevailing in the business world, the tax must be confirmed.
4. Issue: whether payments by a taxpayer, who is in business as a commission agent, are allowable deductions in the computation of his income if made to the creditors of a bankrupt corporation in an endeavor to strengthen his own standing and credit.
5. Procedural History: The Board of Tax Appeals held for the Commissioner. The Court of Appeals affirmed.
6. Facts: Welch Company was a corporation involved in the grain business. Welch (plaintiff) served as the secretary of the corporation before it went bankrupt and was discharged from its debts. Welch was subsequently hired as a commission agent for Kellogg Company, a corporation also in the grain business. In an effort to reconnect with old customers he had known through the E.L. Welch Company, and to strengthen his credit and reputation, Welch substantially repaid E.L. Welch’s debts. On his tax return for those years, Welch deducted the amount of these repayments as business expenses. The Commissioner determined that the repayments were not necessary and ordinary expenses, but rather capital outlay for the purpose of developing his reputation and good will.
7. Rule: in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
8. Reasoning: we may assume that the payments to creditors were necessary for the development of the petitioner’s business. There is need to determine whether they are both necessary and ordinary.
The expense is an ordinary one because payments for such a purpose are the common and accepted means of defense against attack. The way other businesses would deal with the same problem.
Commissioner v. Groetzinger
Year: 1987
Court:
2. Disposition: affirmed.
3. Holding: he did what he did for a livelihood.
4. Issue: whether a full-time gambler who makes wagers solely for his own account is engaged in a trade or business.
5. Procedural History: the Tax Court ruled that no part of his gambling losses would be disallowed. The Appeals court affirmed.
6. Facts: Robert Groetzinger (plaintiff) depended solely on his income from gambling on dog races, on which he spent between 60 and 80 hours a week. In 1978, Groetzinger suffered a net gambling loss. The commissioner of internal revenue (defendant) determined that, under the alternative-minimum-tax law in effect in 1978, a portion of Groetzinger’s losses was a taxable item of tax preference.
7. Rule:
8. Reasoning: if a taxpayer devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness demand that his activity be regarded as a trade or business just as any other readily accepted activity. Respondent says he is supplying goods and services to the gambling market.
To be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer’s primary purpose for engaging in the activity must be for income or profit.
Notice 2018-76
Year: 2018
Court:
2. Disposition:
3. Holding:
4. Issue: are expenses for business meals deductible?
5. Procedural History:
6. Facts:
7. Rule: 274 generally disallows a deduction for expenses with respect to entertainment, amusement, or recreation.
8. Reasoning:
Midland Empire Packing Co. v. Commissioner
Year: 1950
Court:
2. Disposition:
3. Holding: the expenditure for lining the basement walls and floor was essentially a repair and it is deductible as an ordinary and necessary business expense.
4. Issue: whether an expenditure for a concrete lining in petitioner’s basement to oilproof it against an oil nuisance created by a neighboring refinery is deductible as an ordinary and necessary expense.
5. Procedural History:
6. Facts: Midland used its basement to cure and store meats and hides. Occasionally, water seeped into the basement rooms, but the water drained out and did not interfere with Midland’s operations. Eventually, however, oil from a nearby refinery began seeping into Midland’s basement and water wells. Unlike the water seepage, the oil did not drain out. It emitted a strong odor and the fumes created a fire hazard. The Federal meat inspectors advised Midland that it must either stop using the wells and oil-proof the basement, or shut down the plant. Accordingly, Midland oil-proofed the basement by adding concrete lining to the walls and the floor. Midland then deducted this expenditure as a necessary and ordinary business expense.
7. Rule:
8. Reasoning: The respondent has contended that the expenditure is for a capital improvement and should be recovered through depreciation charges and is not deductible.
The expenditure did not add to the value or prolong the expected life of the property over what they were before the event occurred which made the repairs necessary.
The expense is an ordinary one because we know from experience that payments for such a purpose whether large or small, are the common and accepted means of defense against attack.
After expenditure was made, the plant did not operate on a changed or larger scale, nor was it thereafter suitable for new or additional uses. The expenditure served only to permit petitioner to continue the use of the plant, and particularly the basement for its normal operations.
Burnet v. Sanford & Brooks
Year: 1931
Court:
2. Disposition: reversed.
3. Holding: The assessment was properly made. Relief from their alleged burdensome operation which may not be secured under these provisions can be afforded only by legislation.
4. Issue:
5. Procedural History: The Board of Tax Appeals sustained the action of the Commissioner of Internal Revenue and the Court of Appeals reversed.
6. Facts: S&B (plaintiff) performed contractual work of dredging the Delaware River for the United States government (government). The government failed to adequately compensate S&B for the contract expenses. Consequently, S&B’s federal tax returns showed net losses for 1913, 1915, and 1916. S&B sued the government to recover its losses on the contract and was finally reimbursed in 1920 for those losses. S&B did not report the reimbursement as part of its gross income for 1920, reasoning that federal tax law imposed income taxes only on the net profits of a transaction. The reimbursement compensated S&B for its losses on the contract, but left S&B with no net profit. The commissioner of internal revenue (commissioner) (defendant) determined that S&B should have included the reimbursement in its gross income for 1920, and assessed back taxes.
7. Rule:
8. Reasoning: Respond insists that as the Sixteenth Amendment and the Revenue Act of 1918 contemplate a tax only on net income or profits, any application of the statute which operates to impose a tax with respect to the present transaction, from which respondent received no profit, cannot be upheld. -> that the recovery made in 1920 was gross income for that year within the meaning of these sections cannot be doubted.
Respondent insists that if the sum which it recovered is the income defined by the statute, still it is not income, since the particular transaction from which it was derived did not result in any net gain or profit.
If losses from particular transactions were to be set off against gains in others, there would still be the practical necessity of computing the tax on the basis of annual or other fixed taxable periods, which might result in the taxpayer being required to pay a tax on income in one period exceeded by net losses in another.
It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals.
McKinney v. US
Year: 1978
Court:
2. Disposition: Affirmed.
3. Holding: taxpayer never received funds under a claim of right and Section 1341 benefits are not available to him.
4. Issue:
5. Procedural History:
6. Facts: McKinney (plaintiff) worked for the Texas Employment Commission. McKinney began plotting to embezzle money from the Texas Employment Commission in 1956, and in 1966 he embezzled approximately $92,000. McKinney included the $92,000 on his income-tax return as miscellaneous income. In 1969 McKinney was convicted of embezzlement and repaid the Texas Employment Commission. McKinney argued that he acquired the embezzled money under a claim of right and, therefore, was entitled to tax benefits under § 1341 of the Internal Revenue Code.
7. Rule: Section 1341 states that if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to report on his tax return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. The statute merely allows, as an alternative to a deduction in the year of repayment, taxes for the current year to be reduced by the amount taxes were increased in the year of receipt because the funds in question were included in gross income.
Wilcox: the Court concluded that embezzled money did not constitute taxable income.
James: the term gross income in the tax statute was broad enough to include money received when its recipient has such control over it that he derives readily realizable economic value from it.
8. Reasoning: the Government does not dispute the taxpayer’s entitlement to a deduction for the year 1969, but this does not give him the full benefits that would be enjoyed if he could treat the loss as if it had occurred in 1966. The taxpayer relies on his contention that by the enactment of section 1341, Congress intended that a taxpayer, who reported as income funds acquired by theft or embezzlement, be able to obtain, if required subsequently to refund the amounts, the full benefit of a deduction in the year of repayment that would effectively wipe out the economic loss suffered from the prior payment of taxes on the illegally acquired funds.
Section 1341 makes its benefits available only if he had an unrestricted right to such item. Embezzled fun does not appear to the taxpayer that he has any right to the funds.
The taxpayer contends that that whenever gains are enjoyed he is required to report as income, this requirement of itself converts such gains into income held under a claim of right.
Warren v. UNITED STATES
Year: 1980
Court:
2. Disposition: Reversed.
3. Holding: the income was received by the Warrens’ agents in the year of the sale. The fact that the Warrens restricted their access to the sales proceeds does not change the tax status.
4. Issue: whether sale proceeds received by cotton gins for the taxpayers are properly included in the taxpayer’s gross income for the years in which the sales were made.
5. Procedural History: the U.S. moved for a directed verdict and was denied. The jury returned a verdict for the Warrens. The U.S. filed a motion for JNOV and for a new trial, which were denied.
6. Facts: Warrens grow cotton using the cash receipts and disbursements method. Gins arranged sales of the cotton for producers. The gin obtained prices from prospective buyers. A producer could authorize to sell or could instruct the gin to defer the cotton. When deferred, the price was paid to the gin and the proceeds were not transferred to the producer until the following year. Warrens sold cotton in Nov and Dec and Gin company deposited the funds and issued a check on January 2nd. Warrens included the sale proceeds in the following year’s tax return. IRS determined the proceeds should have been included in the year in which the sale occurred.
7. Rule: Section 451 provides that income is to be included in gross income for the taxable year in which received by the taxpayer.
8. Reasoning: the U.S. argues that the court erred in not granting the motion for a directed verdict or the motion for a JNOV. -> agree.
There is no conflict in substantial evidence the gins were the Warrens’ agents for the sale of cotton. The Warrens were the owners of the cotton held for sale; the Warrens were in complete control of its disposition.
The Warrens’ decision to have the gins hold the sales proceeds until the following year was a self-imposed limitation, not a part of the sales transaction between the buyer and the seller. Receipt by an agent is receipt by the principal.
Old Colony Trust Co. v. United States
Year: 1929
Court:
2. Disposition:
3. Holding: the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee.
4. Issue: 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.
5. Procedural History:
6. Facts: William M. Wood (defendant) served as the president of the American Woolen Company from the years 1918 to 1920. In 1916, the American Woolen Company adopted a resolution to pay the income taxes of the company’s officers. For earnings in 1918, Wood owed $681,169.88 in federal taxes. For earnings in 1919, Wood owed $351,179.27 in federal taxes. In accordance with its 1916 resolution, the American Woolen Company paid Wood’s taxes for both years.
7. Rule:
8. Reasoning: the form of the payment is expressly declared to make no difference. The taxes were paid upon a valuable consideration, the services rendered by the employee and as part of the compensation. The payment constituted income to the employee.
David Taylor Enterprises, Inc. v. Commissioner
Year: 2005
Court: TC
2. Disposition:
3. Holding: petitioner held the classic cars for sale to customers.
4. Issue:
5. Procedural History:
6. Facts: Whenever a car was sold, the dealership reported the gain or loss on the sale at ordinary income rates. Respondent issued a Notice of Deficiency determining that the classic cars were held for investment purposes and should be accorded capital loss treatment, not ordinary loss.
7. Rule: (1) frequency and regularity of sales; (2) the substantiality of sales; (3) the duration the property was held; (4) the nature of the taxpayer’s business and the extent to which the taxpayer segregated the collection from his or her business inventory; (5) the purpose for acquiring and holding the property before sales; (6) the extent of the taxpayer’s sales efforts by advertising or otherwise; (7) the time and effort the taxpayer dedicated to the sales; and (8) how the sales proceeds were used.
8. Reasoning: (1): frequent sales serve as an indicium that the assets are being held for sale, while infrequent for investment. -> 80 sales over 12 years, and 69 sales over the 2 years at issue, is sufficiently frequent to support a finding of sale.
(2): frequent sales generating substantial income as tending to show that property was held for sale. Infrequent for investment. -> the dealership consistently sold the classic cars for a profit.
(3): longer holding periods suggest an asset is held for investment. -> The classic cars did not necessitate the same rapid turnover period. The dealership held the classic cars for sale.
(4): property segregated from other property may indicate some assets are held for investment while others are held for sale.
(5): whether the taxpayer intended to hold the property for sale or to hold the property for investment. -> each car was rebuilt to near perfection, and the dealership maintained standards so that each car could be drivable at any time. Sale.
(6): dealership made efforts to advertise and sell the classic cars in years before those at issue.
(7): a taxpayer that devotes little time or effort to the selling of assets may suggest that the assets are held for investment purposes. -> the dealership devoted substantial time to the sales activity.