Gains: When Taxable

Gains: When Taxable.—''Although economic gain is not always taxable as income, it is settled that the realization of gain need not be in cash derived from the sale of an asset.''36 Thus, when through forfeiture of a lease a landlord became possessed of a new building erected on his land by the outgoing tenant, the resulting gain to the former was taxable to him in that same year. '' . . . The fact that the gain is a portion of the value of the property received by the . . . [landlord] does not negative its realization… [Nor is it necessary] to recognition of taxable gain that . . . [the landlord] should be able to sever the improvement begetting the gain from his original capital.'' Hence, the taxpayer was incorrect in contending ''that the Amendment does not permit the taxation of such [a] gain without apportionment amongst the states.''37 Consistent with this holding, the Court has also ruled that when an apartment house was acquired by bequest subject to an unassumed mortgage and several years thereafter was sold for a price slightly in excess of the mortgage, the basis for determining the gain from that sale was the difference between the selling price, undiminished by the amount of the mortgage, and the value of the property at the time of the acquisition, less deductions for depreciation during the years the building was held by the taxpayer. The latter's contention that the Revenue Act, as thus applied, taxed something which was not revenue was declared to be unfounded.38

As against the argument of a donee that a gift of stock became a capital asset when received and that therefore, when disposed of, no part of that value could be treated as taxable income to said donee, the Court has declared that it was within the power of Congress to require a donee of stock, who sells it at a profit, to pay income tax on the difference between the selling price and the value when the donor acquired it.39 Moreover, ''the receipt in cash or property . . . not [being] the only characteristic of realization of income to a taxpayer on the cash receipt basis,'' it follows that one who is normally taxable only on the receipt of interest payments cannot escape taxation thereon by giving away his right to such income in advance of payment. When ''the taxpayer does not receive payment of income in money or property, realization may occur when the last step is taken by which he obtains the fruition of the economic gain which has already accrued to him.'' Hence an owner of bonds, reporting on the cash receipts basis, who clipped interest coupons therefrom before their due date and gave them to his son, was held to have realized taxable income in the amount of said coupons, notwithstanding that his son had collected them upon maturity later in the year.40

36 Helvering v. Bruun, 309 U.S. 461, 469 (1940).

37 309 U.S. at 468, 469.

38 Crane v. Commissioner, 331 U.S. 1, 15-16 (1947).

39 The donor could not, ''by mere gift, enable another to hold this stock free from . . . [the] right . . . [of] the sovereign to take part of any increase in its value when separated through sale or conversion and reduced to possession.'' Taft v. Bowers, 278 U.S. 470, 482, 484 (1929). However, when a husband, as part of a divorce settlement, transfers his own corporate stock to his wife, he is deemed to have exchanged the stock for the release of his wife's inchoate, marital rights, the value of which are presumed to be equal to the current, market value of the stock, and, accordingly, he incurs a taxable gain measured by the difference between the initial purchase price of the stock and said market value upon transfer. United States v. Davis, 370 U.S. 65 (1962).

40 Helvering v. Horst, 311 U.S. 112, 115-16 (1940).

The Court was also called upon to resolve questions as to whether gains, realized after 1913, on transactions consummated prior to ratification of the Sixteenth Amendment are taxable, and if so, how such tax is to be determined. The Court's answer generally has been that if the gain to the person whose income is under consideration became such subsequent to the date at which the amendment went into effect, namely, March 1, 1913, and is a real, and not merely an apparent, gain, said gain is taxable. Thus, one who purchased stock in 1912 for $500 could not limit his taxable gain to the difference, $695, the value of the stock on March 1, 1913 and $13,931, the price obtained on the sale thereof, in 1916; but was obliged to pay tax on the entire gain, that is the difference between the original purchase price and the proceeds of the sale, Goodrich v. Edwards, 255 U.S. 527 (1921). Conversely, one who acquired stock in 1912 for $291,600 and who sold the same in 1916 for only $269,346, incurred a loss and could not be taxed at all, notwithstanding the fact that on March 1, 1913, his stock had depreciated to $148,635. Walsh v. Brewster, 255 U.S. 536 (1921). On the other hand, although the difference between the amount of life insurance premiums paid as of 1908, and the amount distributed in 1919, when the insured received the amount of his policy plus cash dividends apportioned thereto since 1908, constituted a gain, that portion of the latter which accrued between 1908 and 1913 was deemed to be an accretion of capital and hence not taxable. Lucas v. Alexander, 279 U.S. 473 (1929).

However, a litigant who, in 1915, reduced to judgment a suit pending on February 26, 1913, for an accounting under a patent infringement, was unable to have treated as capital, and excluded from the taxable income produced by such settlement, that portion of his claim which had accrued prior to March 1, 1913. Income within the meaning of the Amendment was interpreted to be the fruit that is born of capital, not the potency of fruition. All that the taxpayer possessed in 1913 was a contingent chose in action which was inchoate, uncertain, and contested. United States v. Safety Car Heating Co., 297 U.S. 88 (1936).

Similarly, purchasers of coal lands subject to mining leases executed before adoption of the Amendment could not successfully contend that royalties received during 1920-1926 were payments for capital assets sold before March 1, 1913, and hence not taxable. Such an exemption, these purchasers argued, would have been in harmony with applicable local law whereunder title to coal passes immediately to the lessee on execution of such leases. To the Court, on the other hand, such leases were not to be viewed ''as a 'sale' of the mineral content of the soil'' inasmuch as minerals ''may or may not be present in the leased premises, and may or may not be found [therein]… If found, their abstraction . . . is a time consuming operation and the payments made by the lessee . . . do not normally become payable as the result of a single transaction…'' The result for tax purposes would have been the same even had the lease provided that title to the minerals would pass only ''on severance by the lessee.'' Bankers Coal Co. v. Burnet, 287 U.S. 308 (1932); Burnet v. Harmel, 287 U.S. 103, 106-107, 111 (1932).

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