Charles N. Haverly and Ruth L. Haverly v. United States
513 F.2d 224 (1975)
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Rule of Law:
The value of unsolicited goods received by a taxpayer constitutes gross income when the taxpayer exercises complete dominion over the goods by taking an action that secures a financial benefit, such as claiming a charitable deduction for the goods' value.
Facts:
- Charles N. Haverly was the principal of an elementary school in Chicago during 1967 and 1968.
- In those years, various publishers sent Haverly unsolicited sample textbooks with a total fair market value of $400.
- The books were given to Haverly for his personal retention or any other disposition he wished to make.
- The publishers sent the books with the hope of receiving favorable consideration for their adoption, not as a form of compensation.
- In 1968, Haverly donated all the sample textbooks to the school's library.
- The parties stipulated that the books were not 'gifts' within the meaning of the Internal Revenue Code, as they did not stem from 'detached and disinterested generosity'.
Procedural Posture:
- On his 1968 income tax return, Charles N. Haverly did not include the $400 value of the books as income but did claim a $400 charitable deduction for their donation.
- The Internal Revenue Service (IRS) assessed a tax deficiency against Haverly for the value of the books.
- Haverly paid the deficiency and filed a claim with the IRS for a refund.
- Haverly then instituted an action in the U.S. District Court for the Northern District of Illinois to recover the amount paid.
- The district court (a trial court), deciding the case on stipulated facts, held that the receipt of the books was not income and entered judgment in favor of Haverly.
- The United States, as the defendant, appealed the district court's judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does the value of unsolicited sample textbooks constitute gross income to a recipient who donates the books to a charitable organization and claims a charitable deduction for their value on his tax return?
Opinions:
Majority - Hastings, Senior Circuit Judge
Yes. When a taxpayer demonstrates intent to exercise complete dominion over unsolicited samples by donating them to a charity and taking a tax deduction, the value of the samples constitutes gross income. The Supreme Court has defined gross income under Section 61 as all 'accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.' While mere receipt of unsolicited goods may not meet this standard, the unequivocal act of claiming a charitable deduction for their donation satisfies the element of complete dominion and realization. This act converts the receipt of the property into a tangible financial benefit, and failing to include it in gross income would result in an impermissible double tax benefit. This conclusion is consistent with Revenue Ruling 70-498, which holds that a book reviewer must include the value of unsolicited books in gross income if they are donated and a deduction is taken.
Analysis:
This case establishes a clear and administrable rule for the tax treatment of unsolicited goods. By tying the recognition of income to the affirmative act of claiming a tax benefit (like a charitable deduction), the court avoids the complex question of when mere receipt or retention of an item constitutes an 'accession to wealth.' This decision effectively prevents taxpayers from obtaining a 'double benefit'—excluding an item from income while simultaneously using its value to reduce taxable income through a deduction. The ruling provides a bright-line test that hinges on the taxpayer's own actions to trigger an income event, impacting how professionals who receive sample products must handle them for tax purposes.
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