Digest Author: Kycia Cue
8. Macomber: imposition of tax based on the Revenue Act of 1916 was
EISNER v. MACOMBER (1922)
Petitioner: Mr. Mark Eisner Collector of Internal Revenue
Respondent: Mrs. Macomber
DOCTRINE:
Income may be defined as 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.
Stock dividends are not taxable as income
FACTS:
1. Standard Oil Company of California is a US corporation.
2. It had surplus and undivided profits of $45M from other investments of the
corporation, Out of the $45M, $20M had been earned prior to March 1, 1913.
* instead of distributing the earnings to stockholders, the earnings were
recapitalized
3. In order to readjust the capitalization, the board of directors decided to issue
additional shares sufficient to constitute a stock dividend of 50% of the OCS, to
be paid using the surplus account.
4. An amount equivalent to the par value of the proposed new stock was
transferred accordingly (from surplus account to the capital stock account), and
the new stock duly issued against it and divided among the stockholders.
5. Macomber owned 2,200 shares in Standard Oil Company of California. After
the company declared a 50% stock dividend, she acquired 1,100 additional
shares, 18% (198.77 shares, par value $19,877) of which were represented the
surplus (stock dividends) obtained by the company between March 1, 1913 and
January 1, 1916.
6. She was called upon, and paid under protest, income taxes based on a supposed
income of $19,877, which included the additional shares (stock dividends)
Macomber received.
7. Macomber thus brought an action against the Collector of Revenue to recover
the taxes she paid.
unconstitutional since it violated 16th Amendment of the US Constitution the
stock dividend was not income within its meaning
Definition from to help understand stock dividends (Wikipedia )
A dividend is a payment made by a corporation to its shareholders, usually as a
distribution of profits. When a corporation earns a profit or surplus, it can either re-
invest it in the business (called retained earnings- which was what happened in this
case) or it can distribute it to shareholders.
Distribution to shareholders can be in cash (cash dividends) or, if the corporation has
a dividend reinvestment plan (which in this case they had- recapitalization), the
amount can be paid by the issue of further shares or share repurchase (which was
what happened in this case).
ISSUE:
1. WON a stock dividend is considered as income and thus, subject to income tax
(what is income)
2. WON Revenue Act of 1916 is unconstitutional for violating the 16 th Amendment
(Congress power to tax)
PROVISION:
US Constitution -16th Amendment - "The Congress shall have power to lay and
collect taxes on income, from whatever source derived, without apportionment
among the several States, and without regard to any census or enumeration."
Revenue Act of 1916 - a "stock dividend shall be considered income, to the amount
of its cash value." (NEW TAX LAW- existed during the time the taxes were
assessed)
RULING + RATIO:
1. No, stock dividends are not considered as income (what is income)
A stock dividend reflects the corporation transferring an amount from
"surplus" (retained earnings) to "capital stock."
Such a transaction does not affect the proportionate value each
stockholders share in the company
Digest Author: Kycia Cue
What a stock dividend does is only increase the capital investment of each Government contentions Supreme Court
shareholder, not profits realized or earned out of it. Tax is levied on income derived Stockholder derived nothing except
from corporate earnings paper certificates which reflects the
Nothing could more clearly show that to tax a stock dividend is to tax a fact that they cannot participate in
capital increase, and not income, than the fact that in the nature of things, such earnings
the payment of tax would require conversion of capital since no cash is Tax may be laid when earnings are Stockholder receives no earnings
involved in a stock dividend distribution. received by the stockholder
Profits are distributed by means of There are NO PROFITS involved in
2. YES. The Revenue Act of 1916 provision subjecting stock dividends to tax was stock dividends stock dividends
unconstitutional. Act 1916- tax is on the s/h share in s/h has no such share and receives
corporate earnings nothing
In applying the 16th Amendment, it is important to distinguish between capital and Profits are segregated from his No segregation of profits, nor is
income, as only income is subject to income tax. former capital and he has a separate there separate certificate
certificate representing his invested representing personal gain since the
And since we have already established that stock dividends are not income, then profits and gains certificates NEW AND OLD,
Revenue Act of 1916 doesnt apply represent the same thing- a capital
interest in the corporation
In Towne v. Eisner, court stated that stock dividends were not income, as nothing of CONCLUSION
value was received by Towne - the company was not worth any less than it was when The Court ordered that Eisner (CIR) refund Macomber be refunded the tax she
the dividend was declared, and the total value of Towne's stock had not changed. overpaid

Although the Federal Government has the power to tax income under the
16th Amendment, this does not mean that the Congress can tax as income,
anything other than income.

In this case, the court said that the Congress, through the Revenue Act of
1916 provision, essentially re-defined the term of income as to include stock
dividends despite the fact that STOCK DIVIDENDS ARE NOT INCOME
(as established in the first issue).
Digest Author: Kycia Cue
United States v. Kirby Lumber Co. (1931) The Court simply ruled that the definitions given under the Treasury departments
Petitioner/s: The Federal Government, represented by the Department of Treasury regulations indeed covered the benefit derived from a difference in the prices of the
Respondent: The Kirby Lumber Co. stocks. The Court also pointed out that reliance on the Bowers case cannot apply
Ponencia: J. Holmes here, since the investment of Bowers was not realized completely. The enterprise he
invested in failed, which meant that there was no gain for him, thus explaining why it
DOCTRINE: In the matter of corporations which sell bonds and repurchase them at a was not taxable.
higher price, there is a taxable gain.
However, the instant case obviously shows that there was a gain.

FACTS: (An article online criticizes the decision for conveniently failing to discuss in depth
1. July 1923 The Kirby Lumber Co. issued around 12M USD worth of its bonds the Treasury departments definition of gain. Just post-script.)
at par value.
2. That same year, it purchased the same stocks from the market at a lower value, DISPOSITION: Petition dismissed, CTA decision affirmed.
with a gross difference of about 137,000 USD.
3. (So technically, there appears to be an income derived from their repurchase of
their stocks at a lower price)
4. The Treasurer argues that, pursuant to the Revenue Act which defines Gross
Income as gains or profits and income derived from any source whatever
a. There are several Treasury Regulations (kinda like proclamations) that
give effect to this law, the basic pronouncement being that the
definition of a gain is broad enough to include any fiscal advantage
which goes to the corporation.
i. 'If the corporation purchases and retires any of such bonds at a
price less than the issuing price or face value, the excess of the
issuing price or face value over the purchase price is gain or
income for the taxable year.'
5. The Court of Claims, however (kinda like their CTA) finds in favor of the
corporation, citing that this is not taxable income. They find merit in the defense
of the Corporation when it cited Bowers v. Kerbaugh-Empire Co.(1926)
a. That case involved Bowers owning stock in the KE Co., and it paid him
back in German Marks (the currency at the time of Germany) for an
enterprise that failed. The difference in the conversion was not taxable.
6. Hence, this petition.

ISSUES:
Is the gain from the difference of price a taxable income?

PROVISION
The Revenue Act of 1921 (As Ateneans, you should have read this)

RULING + RATIO:
1. YES.
Digest Author: Kycia Cue
Helvering v. Bruun (1940) Whether or not respondent can be taxed for the financial gain he realized when he
reacquired his leased land with the improvements made by his ejected tenant? YES
Petitioner: Helvering
Respondent: Bruun, U.S Tax Collector RULING + RATIO:
Ponencia: Roberts, J.
Digest Author: Gullas, J. The gain realized is taxable

DOCTRINE: Realization of Gain
FACTS:
1. On July 1, 1915, the respondent, as owner, leased a lot of land and the
building thereon for a term of ninety-nine years.
a. The lease provided that the lessee might at any time, upon giving
bond to secure rentals accruing in the two ensuing years, remove or
tear down any building on the land, provided that no building
should be removed or torn down after the lease became forfeited,
or during the last three and one-half years of the term
b. The lessee was to surrender the land, upon termination of the lease,
with all buildings and improvements thereon.
2. In 1929, the tenant demolished and removed the existing building and
constructed a new one, which had a useful life of not more than fifty years.
3. July 1, 1933, the lease was cancelled for default in payment of rent and
taxes, and the respondent regained possession of the land and building.
Petitioner mistakenly claims that the definition of gross income in Sec.
22(a) of the Revenue Act of 1932 s not broad enough to embrace the gain in
question. While it is true that 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.
Gain may occur as a result of exchange of property, payment of the
taxpayer's indebtedness, and relief from a liability, or other profit realized
from the completion of a transaction. The fact that the gain is a portion of
the value of property received by the taxpayer in the transaction does not
negative its realization.
Here, as a result of a business transaction, the respondent received back his
land with a new building on it, which added an ascertainable amount to its
value. It is not necessary to recognition of taxable gain that he should be
able to sever the improvement begetting the gain from his original capital. If
that were necessary, no income could arise from the exchange of property,
whereas such gain has always been recognized as realized taxable gain.
DISPOSITION: Petition dismissed.

4. Petitioner and US tax authorities claim that respondent realized a net gain of
$51,434.25 (Value of New Building Value of the Demolished Building)

5. Respondent claims:

a. that improvements affixed to the soil became part of the realty

indistinguishably blended in the capital asset
b. that such improvements cannot be separately valued or treated as
received in exchange for the improvements which were on the land
at the date of the execution of the lease
c. the economic gain consequent upon the enhanced value of the
recaptured asset is not gain derived from capital or realized within
the meaning of the Sixteenth Amendment, and may not therefore
be taxed without apportionment.

ISSUES:
Digest Author: Kycia Cue
(a) General definition. 'Gross income' includes gains, profits, and income derived
CIR v. Glenshaw (1960) from salaries, wages, or compensation for personal service * * * of whatever kind
and in whatever form paid, or from professions, vocations, trades, businesses,
Petition: Petition for certiorari commerce, or sales, or dealings in property, whether real or personal, growing out of
Petitioner: Commissioner of Internal Revenue the ownership or use of or interest in such property; also from interest, rent,
Respondent: Glenshaw Glass Company dividends, securities, or the transaction of any business carried on for gain or profit,
Ponencia: Warren or gains or profits and income derived from any source whatever. * * *

DOCTRINE: Income is realized whenever there are instances of RULING + RATIO: YES
[1] undeniable accessions to wealth Section 22 is a catchall provision (gains or profits and income derived from
[2] clearly realized any source whatever)
[3] over which the taxpayers have complete dominion Income is not limited to "the gain derived from capital, from labor, or from
both combined
FACTS: (Consolidated cases having identical issues) Income is realized whenever there are instances of
o [1] undeniable accessions to wealth
Commissioner v. Glenshaw Glass Co o [2] clearly realized
o [3] over which the taxpayers have complete dominion
1. Glenshaw Glass Company, domiciled in Pennsylvania, manufactures glass Mere fact that payments were extracted from wrongdoers as punishment for
bottles and containers. unlawful conduct cannot detract their character as taxable income to
recipients.
2. Glenshaw won against Hartford-Empire Company in an antitrust lawsuit
wherein it prayed for exemplary damages for fraud and treble damages for
injury to its business. DISPOSITION: Reversed.

3. It was paid $800,000. The $324k+ representing the payment for the said
damages was not reported as income for the tax year involved.

Commissioner v. William Goldman Theaters Inc

1. William Goldman Theaters, a Delaware corporation operating motion

pictures in Pennsylvania was also involved in an antitrust lawsuit against
Loews Inc.

2. It won the case and was awarded $375,000. Only $125,000 was reported as
gross income.

3. It claimed that the $250,000 consisted of the punitive damages so such was
not taxable.

ISSUE: WoN money received as exemplary damages for fraud or as antitrust

recovery must be reported as gross income

PROVISION: Section 22. Gross Income

Digest Author: Kycia Cue
James v US (1961)
DOCTRINE: It had been a well-established principle that unlawful, as well as
lawful, gains are comprehended within the term "gross income." the net income of a
taxable person shall include gains, profits, and income . . . from . . . the transaction of
any lawful business carried on for gain or profit, or gains or profits and income
derived from any source whatever
3. When the statute was amended in 1916, the one word "lawful" was
omitted. This revealed, we think, the obvious intent of that Congress to
tax income derived from both legal and illegal sources, to remove the
incongruity of having the gains of the honest laborer taxed and the
gains of the dishonest immune.

FACTS:

6. Petitioner is a union official who embezzled $738,000 during the years 1951
through 1954 from his employer union and from an insurance company
with which the union was doing business.
7. Petitioner failed to report these amounts in his gross income in those years,
and was convicted for willfully attempting to evade the federal income tax
due for each of the years 1951 through 1954. He was sentenced to a total of
three years' imprisonment.
8. In addition to criminal penalties for embezzlement, the IRS stepped in and
claimed that the $738k should be counted in James' gross income. James
disagreed since a person is legally obligated to repay money that they steal,
they've received no income in the same way as a person receives no income
from taking out a loan. So there should be no tax liability.

ISSUES: Whether embezzled funds are to be included in the "gross income" of the
embezzler in the year in which the funds are misappropriated.

RULING + RATIO: YES.

1. When a taxpayer acquires earnings, lawfully or unlawfully, without the

consensual recognition, express or implied, of an obligation to repay
and without restriction as to their disposition, "he has received income
which he is required to 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." A gain" constitutes taxable
income when its recipient has such control over it that, as a practical
matter, he derives readily realizable economic value from it."

2. It had been a well-established principle that unlawful, as well as lawful,

gains are comprehended within the term "gross income." the net
income of a taxable person shall include gains, profits, and income . . .
from . . . the transaction of any lawful business carried on for gain or
profit, or gains or profits and income derived from any source
whatever.
Digest Author: Kycia Cue
Helvering v Horst from himself to others as the means of procuring the satisfaction of his wants. The
Petitioner: Helvering taxpayer has equally enjoyed the fruits of his labor or investment and obtained the
Respondent: Horst satisfaction of his desires whether he collects and uses the income to procure those
Ponente: satisfactions or whether he disposes of his right to collect it as the means of
procuring them
DOCTRINE: Although the donor here, by the transfer of the coupons, has precluded any
possibility of his collecting them himself, he has nevertheless, by his act, procured
The power to dispose of income is the equivalent of ownership of it. The exercise of payment of the interest, as a valuable gift to a member of his family. Such a use of
that power to procure the payment of income to another is the enjoyment, and hence his economic gain, the right to receive income, to procure a satisfaction which can be
the realization, of the income by him who exercises it obtained only by the expenditure of money or property would seem to be the
enjoyment of the income whether the satisfaction is the purchase of goods at the
FACTS: corner grocery, the payment of his debt there, or such nonmaterial satisfactions as
may result from the payment of a campaign or community chest contribution, or a
1. Horst detached the negotiable interest coupons worth around $25k from his gift to his favorite son. Even though he never receives the money, he derives money's
negotiable bonds and gave them to his son, who collected the same at worth from the disposition of the coupons which he has used as money or money's
maturity worth in the procuring of a satisfaction which is procurable only by the expenditure
2. Horst kept his books on a cash basis which is why he never recorded the of money or money's worth. The enjoyment of the economic benefit accruing to him
transfer to his son by virtue of his acquisition of the coupons is realized as completely as it would have
3. The Commissioner added the value of the coupon and determined that Horst been if he had collected the interest in dollars and expended them for any of the
had a tax deficiency for that year pursuant to Section 22 of the Revenue Act purposes named
of 1934
The power to dispose of income is the equivalent of ownership of it. The exercise of
ISSUES: that power to procure the payment of income to another is the enjoyment, and hence
the realization, of the income by him who exercises it
WoN a gift made during a donors taxable year is part of the donors taxable income

RULING + RATIO:

YES

In summary, the donation is part of the donors taxable income because such income
has already been realized in the hands of the donor albeit the fact that he donated the
same to a third person. Disposition of income is correlated to ownership of it, and as
such it remains taxable even if donated

The tax laid by the 1934 Revenue Act upon income "derived from . . . wages or
compensation for personal service, of whatever kind and in whatever form paid . . . ;
also from interest . . . " cannot fairly be interpreted as not applying to income derived
from interest or compensation when he who is entitled to receive it makes use of his
power to dispose of it in procuring satisfactions which he would otherwise procure
only by the use of the money when received

Underlying the reasoning in these cases is the thought that income is "realized" by
the assignor because he, who owns or controls the source of the income, also controls
the disposition of that which he could have received himself and diverts the payment
Digest Author: Kycia Cue
Cottage Sav. Ass'n v. CIR 499 U.S. 554 (1991)
Petitioner: Cottage Savings Association
Respondent: Commissioner of Internal Revenue
Ponencia: MARSHALL, T.
DOCTRINE: "Gain or loss in the value of property is taken into account for income
tax purposes only if and when the gain or loss is "realized," that is, when it is tied to
a realization event, such as a sale, or disposition of the property."
FACTS:
1. Cottage Savings is a savings and loan association (S & L) regulated by the Federal
Home Loan Bank Board (FHLBB). Like many S & L's, Cottage Savings held
numerous long-term, low-interest mortgages.
2. These institutions would have benefited from selling their devalued mortgages in
order to realize tax-deductible losses. However, they were deterred from doing so by
FHLBB, which required them to record the losses on their books. Reporting these
losses would have placed many S & L's at risk of closure by the FHLBB.
3. The FHLBB responded to this situation by relaxing its requirements for the
reporting of losses. In issued "Memorandum R-49," stating that S & L's need not
report losses associated with mortgages that are exchanged for "substantially
identical" mortgages held by other lenders. The FHLBB's acknowledged purpose for
Memorandum R-49 was to facilitate transactions that would generate tax losses but
that would not substantially affect the economic position of the transacting S & L's.
4. Cottage Savings sold "90% participation interests" in 252 mortgages to 4 S & L's.
It simultaneously purchased "90% participation interests" in 305 mortgages held by
these S & L's.
5. When Cottage Savings filed its federal income tax return, it claimed a $2.5 million
loss - the difference between the original value of the mortgages it gave away and the
current value of the mortgages it received in return.
6. CIR disallowed the deduction. The Tax Court held - deduction was permissible.
CA reversed. SC granted certiorari. SC: We now reverse!
ISSUES:
1. WON a financial institution may realize tax deductible losses by exchanging its
mortgage loans for mortgage loans held by other financial institutions.
2. Whether or not Cottage Savings indeed sustained its losses. (additional in case sir
asks)
PROVISION: Internal Revenue Code (26 U.S .Code)
Section 1001 (a) Computation of gain or loss
The gain from the sale or other disposition of property shall be the excess of the
amount realized therefrom over the adjusted basis provided in section 1011 for
determining gain, and the loss shall be the excess of the adjusted basis provided in
such section for determining loss over the amount realized .
Section 165(a) states that a deduction shall be allowed for "any loss sustained during
the taxable year and not compensated for by insurance or otherwise."
RULING + RATIO:
1. YES.
INTRO: Rather than assessing tax liability on the basis of annual fluctuations in the
value of a taxpayer's property, the Internal Revenue Code defers the tax
consequences of a gain or loss in property value until the taxpayer "realizes" the gain
or loss. The realization requirement is implicit in 1001(a) of the Code. 1001(a),
which defines "the gain or loss from the sale or other disposition of property" as the
difference between "the amount realized" from the sale or disposition of the property
and its "adjusted basis."
(NOT SO IMPORTANT: The concept of realization is "founded on administrative
convenience." Under an appreciation-based system of taxation, taxpayers and the
Commissioner would have to undertake the "cumbersome, abrasive, and
unpredictable administrative task" of valuing assets on an annual basis to determine
whether the assets had appreciated or depreciated in value.)
IMPORTANT: Section 1001(a)'s language provides a straightforward test for
realization: to realize a gain or loss in the value of property, the taxpayer must
engage in a "sale or other disposition of the property." The parties agree that the
exchange of participation interests in this case cannot be characterized as a "sale"
under 1001(a); the question is whether the transaction constitutes a "disposition of
property." The Commissioner argues that an exchange of property can be treated as a
"disposition" under 1001(a) only if the properties exchanged are materially
different.
(NOT SO IMPORTANT: Because Congress has delegated to the Commissioner the
power to promulgate "all needful rules and regulations for the enforcement of the
Internal Revenue Code," the Court must defer to his regulatory interpretations of the
Code so long as they are reasonable. Moreover, "Treasury regulations and
interpretations long continued without substantial change, applying to unamended or
substantially reenacted statutes, are deemed to have received congressional approval
and have the effect of law.')
Digest Author: Kycia Cue
GIST: The properties exchanged were "materially different." The Court held that the
participation interests exchanged by Cottage Savings and the other S&Ls were
"materially different" because the loans involved were made to different obligors and
secured by different properties. Even though the interests were "substantially
identical" for the FHLBB's purposes, that did not mean they were not materially
different for taxation purposes. Mortgages can be substantially identical for
Memorandum R-49 purposes and still exhibit "differences" that are "material" for
purposes of the Internal Revenue Code. Therefore, the exchange was a "disposition
of property," Cottage Savings had realized a loss, and their deduction was
appropriate. Marshall reasoned that properties materially differ for tax purposes
when their respective possessors enjoy different legal entitlements from each. As
long as the properties being exchanged were not identical, a realization had taken
place.
2. YES. The Commissioner contends that the losses were not sustained because they
lacked "economic substance," by which the Commissioner seems to mean that the
losses were not bona fide.
There is no contention that the transactions in this case were not conducted at arm's
length, or that Cottage Savings retained de facto ownership of the participation
interests it traded to the four reciprocating S & L's. Cottage Savings sustained its
losses within the meaning of 165(a).
(A) In the case of any loss claimed to have been sustained from any sale or other
disposition of shares of stock or securities where it appears that within a period
beginning thirty (30) days before the date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has acquired (by purchase or by
exchange upon which the entire amount of gain or loss was recognized by law), or
has entered into a contact or option so to acquire, substantially identical stock or
securities, then no deduction for the loss shall be allowed under Section 34 unless the
claim is made by a dealer in stock or securities and with respect to a transaction
made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option
to acquire) is less than the amount of stock or securities sold or otherwise disposed
of, then the particular shares of stock or securities, the loss from the sale or other
disposition of which is not deductible, shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or option
to acquire which) resulted in the non-deductibility of the loss, shall be determined
under rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.

DISPOSITION: CA is reversed, and the case is remanded for further proceedings

consistent with this opinion.

Dissenting Opinion:
Justice Blackmun dissented, joined by Justice White.

-A material difference is a difference capable of influencing the decision made by the

parties to the transaction.
-The majority created something of an anomaly by allowing the property interests
exchanged here to be "identical" for accounting purposes but "different" for tax
purposes.
-The substance of the transactions, including the fact that Cottage Savings retained a
10% interest in loans it traded away so it could continue servicing them, did not point
to any real difference that should permit the allowance of a deduction.

Additional Info:
NIRC 1997 (not really mentioned in the case)

SEC. 38. Losses from Wash Sales of Stock or Securities. -

Digest Author: Kycia Cue
CIR v Minzer
Petitioner: Commissioner of Internal Revenue 6. The taxpayer obtained insurance which the companies were prohibited
Respondent: Sol Minzer and Adele Minzer by law from selling to him at any discount. It cannot be said that the
Ponente: Cameron, Circuit Judge insurance had a value less than the amount of the premiums. It must
then be said that a benefit inured to the taxpayer to the extent of his
DOCTRINE: Commissions received by the agent on the insurance policies written commissions. The benefit is neither diminished nor eliminated by
on his own life were compensation for services and as such taxable income referring, as does the Tax Court, to the word "commission" as a verbal
trap. The commissions were, we conclude, compensation for services
FACTS: and as such were income.

9. In 1954, Sol Minzer was an insurance agent or broker. During that year he Disposition: .It follows that the decision of the Tax Court must be and it is hereby
procured or kept in force policies of insurance upon his life. Reversed.
10. As a representative of the insurance companies which had issued the
policies he became entitled to commissions on the policies to the same
extent as though the insurance had been on the life of someone else.
11. He received the commissions, or the benefit of them, upon these policies on
his own life either by:
a. remitting the premiums, less commissions, to the companies, or
b. by remitting the premiums in their entirety and receiving back
from the companies their checks to him for the amounts of the
commissions.
12. Sol Minzer did not include these commissions as taxable income in his
return for 1954.
13. The Commissioner of Internal Revenue recomputed the tax by including the
commissions as income and made a deficiency determination.
14. The Tax Court held for Sol Minzer, but seven judges dissented.

ISSUES:

1. WoN his commissions should be included as income.

RULING + RATIO:

4. Yes. Court of Appeals held that the commissions received by the agent
on the insurance policies written on his own life were compensation for
services and as such taxable income.

5. The service rendered to the company, for which it was required to

compensate him, was no different in kind or degree where the taxpayer
submitted his own application than where he submitted the application
of another. In each situation there was the same obligation of the
company, the obligation to pay a commission for the production of
business measured by a percentage of the premiums. In each situation
the result was the same to the taxpayer.
Digest Author: Kycia Cue
Rev. Rul. 79-24, 1979-1 C.B. 60 (15) Income from an interest in an estate or trust.

DOCTRINE: If services are paid for other than in money, the fair market value of the
property or services taken in payment must be included in income.
FACTS:
First Situtation
1. Both the lawyer and the housepainter are members of a barter club, an
organization that annually furnishes its members a directory of members
and the services they provide.
a. Members contact other members directly and negotiate the value of
the services to be performed.
2. In return for personal legal services performed by a lawyer for a
housepainter, the housepainter painted the lawyer's personal residence.
Second Situation
1. An individual who owned an apartment building received a work of art
created by a professional artist in return for the rent-free use of an apartment
for six months by the artist.
ISSUE/S:
1. WON the fair market value of the services rendered or property given in
exchange or in payment for a particular service or property be included in ones
gross income.
RULING + RATIO:
YES
In Situation 1: The fair market value of the services received by the lawyer
and the housepainter are includible in their gross incomes.
In Situation 2: The fair market value of the work of art and the six months
fair rental value of the apartment are includible in the gross incomes of the
apartment-owner and the artist respectively.
Section 1.61-2(d)(1) of the Internal Revenue Regulations provides that if
services are paid for other than in money, the fair market value of the
property or services taken in payment must be included in income.
If the services were rendered at a stipulated price, such price will be
presumed to be the fair market value of the compensation received in the
absence of evidence to the contrary.
Note: This is not a case. Its a ruling explaining the implications of barter
transactions as illustrated in the situations given. Heres the link to the full text if you
want to check it out (pero halos ito na din yun kasi short lang siya):
https://www.charitableplanning.com/document/681091

PROVISION:
SEC. 61. GROSS INCOME DEFINED. (Internal Revenue Code of 1954)
(a) GENERAL DEFINITION.Except as otherwise provided in this
subtitle, gross income means all income from whatever source derived,
including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, and
similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
Digest Author: Kycia Cue
CLARK v. CIR (1939) According to one case, compromise payments in settlement of an action for
Petitioner: Edward H. Clark damages against a bank on account of conduct impairing the taxpayer's
Respondent: Commissioner of Internal Revenue good will by injuring its reputation are not taxable (case also mentioned
Ponencia: Leech damages for breach of promise to marry and for slander and libel) The
theory behind this ruling is that recoupment on account of such losses is not
DOCTRINE: Payment as damages arising out of loss or is not income since it is not income since it is not 'derived from capital, from labor or from both
'derived from capital, from labor or from both combined combined.
So long as CLARK did not 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
FACTS: him in the taxable year, by way of recompense, is not then includable in his
15. CLARK was required by the Revenue Act of 1932 to file a Federal gross income.
Income Tax Return for the year 1932.
16. Prior to 1932, CLARK retained experienced tax counsel to prepare the DISPOSITION: Decision in favor of petitioner.
necessary returns for him and/or his wife. Said counsel advised CLARK to
file one instead of two separate returns.
17. In 1934, a duly appointed revenue agent of the U.S audited CLARKs 1932
return, and recommended an additional assessment from CLARK worth
$32,820.14. CLARK thereafter paid the said amount.
18. It was discovered that the error was due to the improper deduction from
income the total amount of losses sustained on the sale of capital assets held
for a period of more than two years instead of applying the statutory
limitation required by Section 101(b) of the Revenue Act of 1932.
19. Recomputations were then made which revealed that if CLARK and his
wife had filed separate returns for 1932 their combined tax liability would
have been $19,941.10 less than that which was finally assessed against and
paid by CLARK.
20. Counsel admitted that if he had not erred in computing the tax liability
shown on the joint return filed by CLARK, he would have advised him to
file separate returns.
21. Accordingly, tax counsel paid CLARK the sum of $19,941.10 which
CLARK accepted.
22. In determining CLARKs 1934 tax liability, CIR included the $19,941.10 as
income.

ISSUES: WON the $19,941.10 received by CLARK from his counsel should be
included as taxable income

RULING + RATIO:
NO.
When counsel filed a joint assessment, CLARK became obligated to and
did pay the taxes computed on that basis. In paying that obligation, he
sustained a loss which was caused by the negligence of his counsel. The
$19,941.10 was paid to CLARK, not as taxes, but as compensation for his
loss. The fact that such obligation was for taxes is of no moment here.
Digest Author: Kycia Cue
BIR Ruling 051-2000

INCOME TAX; Exemption of retirement benefits under RA 4917 - Section 36 of the

Income Tax Regulations provides that income in the broad sense, means all wealth
which flows into the taxpayer other than a mere return of capital. Any and all
amounts which represent a return of the personal contributions of the employees to
the Fund, who are still in the active service of the Society of Divine World (SVD)
shall not be subject to income tax, since the same are considered as mere return of
capital.

However, the income of earnings derived from the personal contributions by the
employee-members' are subject to income tax since in a retirement plan under R.A.
No. 4917, the employer, or officials and employees or both, contribute to a trust fund
for the purpose of distributing to such officials and employees or their beneficiaries,
the corpus and income accumulated by the trust in accordance with the plan. Section
2(d) of Revenue Regulations No. 1-68, as amended, provides for exemption from
income tax only the benefits received by officials or employees upon retirement, in
accordance with the BIR-approved Retirement Plan rules or written program.
Consequently, any and all amounts actually distributed to said member-employees
over and above their personal contributions shall be taxable to them in the year in
which so paid or distributed, considering that such distribution has been effected
before their retirement from SVD. This means that, only upon retirement, the total
benefits which the employees shall receive consisting of their personal contributions,
counterpart contribution for the employer and the income of the Fund to which the
employees are entitled and are distributed to them shall be exempt from income tax.
Digest Author: Kycia Cue
Rev. Rul. 81-277, 1981-2 C.B. 14
DOCTRINE: Payments by the one causing a loss that do not more than restore a
taxpayer to the position he or she was in before the loss was incurred are not
includible in gross income because there is no economic gain.
The determination of whether the proceeds received in a lawsuit or received in
settlement of a lawsuit constitute income under section 61 of the Code depends on
the nature of the claim and the actual basis for recovery. If the recovery represents
damages for lost profits, it is taxed as ordinary income. If, however, the recovery is
treated as a replacement of capital, the damages received from the lawsuit are treated
as a return of capital and are not taxable as income.

FACTS: Payments by the one causing a loss that do not more than restore a taxpayer to the
1. A constructor agreed to construct a nuclear generating plant for a position he or she was in before the loss was incurred are not includible in gross
corporation. The construction contract specified that the contractor would income because there is no economic gain.
provide, at no additional cost to the company, any additional items that
would be necessary to deliver a complete, safe, licensable, fully operational The payment from the contractor to the company represents the estimated present
plant. During the construction period regulatory agencies imposed stricter damages the company has incurred because of the breach of contract, determined
environmental safeguards on nuclear generating plants than were in effect at under the settlement agreement as the estimated additional costs needed to satisfy
the time the contract was signed. new regulatory standards as required under the contract. The company has received
2. Disputes arose between the contractor and company over the obligation of no economic gain as a result of the payment and is merely being made whole under
the former to provide for stricter safeguards and to include them as part of the contract. The company was only restored to the position that it would have been
the delivered plant at the original contract price. The company already paid in if the contractor had fulfilled the terms of the contract.
a substantial amount of the contract price.
3. The parties eventually settled their dispute by agreeing that the terms of the
contract must be met by both parties. They also agreed that the contractor
was responsible to deliver a plant that met the stricter environmental
safeguards and that it would cost an additional amount. The company was
required to forward the additional amount to the contractor.
4. In light of these agreements, the company paid the value of the work
performed under the contract. However, instead of completing the plant's
construction, the contractor returned the additional amount it was paid.
Both parties then executed general releases to each other and the constructor
ceased the construction.
5. The company then contracted with a third party to finish construction of the
nuclear generating plant. It had to pay the third party a higher amount than
what it agreed to pay the previous constructor to obtain a plant that satisfied
the regulatory agencies standards.

ISSUE: Whether or not the proceeds received in a lawsuit or received in settlement

of a lawsuit constitute income.

RULING + RATIO:
NO. The payment/return made by the contractor to the company does not constitute
as income on the part of the company. It is only a return of capital.

The basis of the plant should be adjusted downward deducting the amount returned
by the contractor and adjusted upward adding the additional amount that it incurred
when the company employed the services of a third party to finish construction.
Digest Author: Kycia Cue
CESARINI v. US (1969)
Petitioner: Ermenegildo CESARINI et al.,
Respondent: UNITED STATES OF AMERICA
DOCTRINE:
Gross income means all income from whatever source derived, unless excluded by
law.
FACTS:
23. Plaintiffs are husband and wife and live in Ohio
24. 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.
25. 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.
26. Being unable to ascertain who put the money there, plaintiffs exchanged the
old currency for new at a bank, and reported the sum of $4,467.00 on their
1964 joint income tax return as ordinary income from other sources.
27. On October 18, 1965, plaintiffs filed an amended return with the District
Director of Internal Revenue in Cleveland, Ohio, 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.
28. On January 18, 1966, the Commissioner of Internal Revenue rejected
taxpayers' refund claim in its entirety, and plaintiffs filed the instant action
in March of 1967.
Also, Section 1.61-1(a) of the Treasury Regulations reiterates the
broad construction of gross income: "Gross income means all
income from whatever source derived, unless excluded by law.
Gross income includes income realized in any form, whether in
money, property, or services. * * *"
Furthermore, the I.R.S. published the following rule in 1953: 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."
2. NO. Court finds that the $4,467.00 sum was properly included in gross
income for the calendar year of 1964.
The plaintiffs did not discover the old currency until 1964. 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.
3. NO. While the broad definition of "capital asset" in Section 1221 of Title 26
would on its face cover both the piano and the currency, Section 1222 (3)
defines long-term capital gains as those resulting from the "sale or exchange
of a capital asset held for more than 6 months."
Aside from the fact that the piano for which plaintiffs paid $15.00
and the $4,467.00 in currency found within it are economically
dissimilar, neither the piano nor the currency have been sold or
exchanged.

ISSUE:
1. W/N the plaintiffs are entitled to the refund
2. W/N the discovered money should be included in the plaintiffs gross
income in 1957 and therefore the collection of tax was barred by the statute
of limitations
3. W/N they are entitled to capital gains treatment upon the discovered money

RULING + RATIO:
1. NO. The sum found in the piano is included in the gross income and
plaintiffs should therefore not be entitled to the refund.
Section 61(a) of Title 26 U.S.C., 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: * * *"
Digest Author: Kycia Cue
Hornung v Commissioner (1967)
Petitioner: PAUL HORNUNG
Respondent: COMMISSIONER OF INTERNAL REVENUE
Ponencia: HOYT, J.
DOCTRINE: Gross income includes amounts received as prizes and awards
unless section 117 (relating to scholarships and fellowship grants), or other
exceptions are available.
***This case involves the same person but the Commissioner has three claims
against him.
THE CORVETTE STORY
FACTS:
1. Each year Sport Magazine awards a new Corvette automobile to the player
selected by its editors as the outstanding player in the National Football
League championship game.
2. On December 31, 1961, petitioner Paul Hornung played in the NFL
championship game between the Green Bay Packers and the New York
Giants. The game was played in Green Bay, Wisconsin. At the end of this
game petitioner was selected by the editors of Sport as the most valuable
player and winner of the Corvette.
3. As far as Sport was concerned the car was available to petitioner on
December 31, 1961, as soon as the award was announced. However,
December 31, 1961, was a Sunday and the New York dealership at which
the car was located was closed.
4. Petitioner was informed that a luncheon was to be held for him in New
York City on the following Wednesday (January 3, 1962) by the publisher
of Sport, at which luncheon his award would be presented.
5. Petitioner attended and was photographed during the course of the
presentation of the automobile to him but he was not required to attend the
lunch or to pose for photographs or perform any other service for Sport as a
condition or as consideration for his receipt of the car.
6. The fair market value of the Corvette automobile received by petitioner was
$3,331.04.
7. He proceeded to sell it. Petitioner reported the sale of the Corvette in his
1962 Federal income tax return
8. Petitioner did not include the fair market value of this car in his gross
income for 1962, or for any other year.
(Ideally, the petitioner should have reported BOTH the value of the car AND the
profit from the sale of the car as part of his income pool. BUT in this case, he only
reported the profit from the sale as part of his income so, in a way, he escaped
taxation on the value of the car itself)
ISSUE:
W/N the value of a 1962 Corvette automobile which was won by petitioner for his
performance in a professional football game should be included in his gross income
for the taxable year 1962.
RULING + RATIO:
YES, the value of a Corvette automobile which was awarded to petitioner for being
named the outstanding player in the 1961 NFL championship game constituted gross
income under sec. 74, I.R.C. in the year of receipt, 1962.
He contends that the car was received as a gift and therefore properly excluded from
gross income under and that it was received as a nontaxable prize or award. It is our
opinion that certainly the donor's motive here precludes a determination that Sport
Magazine made a gift of the Corvette to petitioner in 1962. It is clear that there was
no detached and disinterested generosity on the part of Sport Magazine, as this was
really a form of advertisement for them.
Petitioner undeniably received an award for his outstanding performance in the NFL
championship game. Under the provisions of section 74, gross income includes
amounts received as prizes and awards unless section 117(relating to scholarships
and fellowship grants), or other exceptions are available. Hence, the petitioner is
precluded from effectively arguing that the award constituted a gift.
***Another issue: Notwithstanding the game having been played in the year of
1961, it should be included in the 1962 gross income report and not in the 1961
report. This conclusion is drawn out from the contrsuctive possession theory. The
basis of constructive receipt is essentially unfettered control by the recipient over the
date of actual receipt. Petitioner has failed to convince us that he possessed such
control on December 31, 1961, over the receipt of the Corvette. The evidence
establishes that the Corvette which was presented to petitioner on January 3, 1962,
was in the possession of a Chevrolet dealer in New York City on December 31,
1961. At the time the award was announced in Green Bay, the editor in chief of Sport
had neither the title nor keys to the car, and nothing was given or presented to
petitioner to evidence his ownership or right to possession of the car at that time.
Digest Author: Kycia Cue
THE THUNDERBIRD STORY FACTS:
FACTS: 1. The Green Bay Packers, Inc., the employer of Hornung, announced that it
1. In 1962, the Ford Motor Co. furnished petitioner a 1962 Thunderbird would give a fur stole to the wife, friend, or mother of each player on the
automobile. Title to this car was retained by Ford but petitioner paid for the team. Since petitioner was not married at the time, Hornung gave this to his
insurance and all operating expenses. mother.

2. When petitioner was given the Thunderbird to use, he did not have any
arrangement or obligation to be photographed in the car, nor was he asked
to make any personal appearances at Ford dealerships or to make any
special effort to be seen by the public driving the car.
3. However, petitioner was asked if he would come in and say hello to the
kids at Milwaukee Punt, Pass and Kick Contest, a contest for children
regularly sponsored by Ford Motor Co. which petitioner and a few of the
ball players' would regularly attend.
4. Petitioner did not recognize or report gross income with respect to his use of
the Thunderbirds during 1962. The fair rental value of petitioner's use of the
Thunderbirds during 1962 was determined by respondent to be $600.
ISSUE:
W/N the value of the use of 1962 Thunderbird automobiles furnished to the
petitioner by the Ford Motor Co. should be included in his gross income for the
taxable year 1962.
2. Petitioner reported no gross income in any year with respect to the receipt
by his mother of the fur stole in 1961. The fur stole had a fair market value
of $395.
ISSUE:
W/N the petitioner's gross income for 1962 should include the value of a fur stole
received by petitioner's mother from his employer.
RULING + RATIO:
NO, petitioner's gross income for 1962 should not include the value of a fur stole
which was received by petitioner's mother from his employer in 1961.
Due to our factual finding that petitioner's mother actually received the stole before
the end of 1961, and because petitioner utilized the cash receipts method of
computing income, we must hold that the receipt of the fur stole did not constitute
income to petitioner in 1962. Since petitioner's taxable year 1961 is not before us, we
are precluded from further consideration of this issue.

RULING + RATIO:
YES, the value of the free use of Thunderbird furnished to the petitioner by the Ford
Motor Co. was not received as the result of a tax-exempt gift; and, under the
particular facts of the case, an economic benefit was realized which constituted gross
income.

Petitioner argues that the free use of the cars was a gift or loan to him.
Petitioner was not obligated to perform any special services for the Ford Motor Co.
in return for the privilege of using the cars, and there was no employment contract
involved. In this situation, it is contended that the free use of the Thunderbirds did
not constitute taxable income. Petitioner paid for all the operating expenses of the
cars and the insurance.

We agree with petitioner's position that a taxable benefit does not arise every
time an item of personal property is loaned to another. It should be noted, however,
that respondent is not attempting to levy a tax on the value of a Thunderbird but only
on the estimated rental value for the period of use. Thus, retention of title to the
Thunderbirds by the Ford Motor Co. is irrelevant to the instant controversy.
Petitioner should included the value of
THE MINK STOLE STORY