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Taft v. Bowers

Supreme Court of the United States
278 U.S. 470, 49 S.Ct. 199, 1929 U.S. LEXIS 17 (1929)
ELI5:

Rule of Law:

For the purpose of calculating taxable income on the sale of gifted property, the basis for the donee is the same as the cost basis for the donor. This requirement does not violate the Sixteenth Amendment's definition of income.


Facts:

  • In 1916, an individual (Donor A) purchased 100 shares of stock for $1,000.
  • By 1923, the fair market value of the stock had increased to $2,000.
  • In 1923, Donor A gave the shares of stock as a gift to Elizabeth C. Taft (Donee B).
  • Later in 1923, Taft sold the stock for $5,000.

Procedural Posture:

  • The United States assessed an income tax against Elizabeth C. Taft, calculated as the difference between her sale price and her father's original purchase price.
  • Taft paid the tax and then sued the United States in U.S. District Court for a refund of the portion of the tax attributable to the appreciation that occurred before she received the gift.
  • The District Court, a trial court, ruled in favor of Taft.
  • The United States, as appellant, appealed the decision to the U.S. Circuit Court of Appeals.
  • The Circuit Court of Appeals reversed the trial court's judgment, ruling in favor of the United States (appellee at this stage).
  • Taft, as petitioner, appealed to the U.S. Supreme Court.

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Issue:

Does the Revenue Act of 1921, by requiring a donee to use the donor's original cost basis to calculate taxable gain upon the sale of gifted property, tax something that is not 'income' to the donee and therefore violate the Sixteenth Amendment?


Opinions:

Majority - Justice McReynolds

No, the Revenue Act of 1921 is constitutional. A donee selling gifted property can be taxed on the appreciation in value that occurred during the donor's ownership because the entire gain is derived from a single investment of capital and is only realized upon the sale by the donee. The Sixteenth Amendment permits Congress to tax 'incomes from whatever source derived,' and the court found that the entire gain, from the donor's purchase to the donee's sale, constitutes such income. The donor cannot avoid the sovereign's right to tax the appreciation by merely giving the asset away. By accepting the gift, the donee 'stepped into the shoes' of the donor, voluntarily assuming the donor's position with respect to the property and its inherent tax liability. This statutory scheme is a reasonable method for Congress to prevent tax avoidance and ensure gains from capital investments are taxed.



Analysis:

This decision established the foundational principle of a 'carryover' or 'transferred' basis for property acquired by gift, which remains a cornerstone of U.S. tax law. It solidified Congressional power to define the mechanics of income realization to prevent tax avoidance loopholes. By rejecting the argument that the value of the gift at the time of transfer becomes the donee's capital, the Court prevented gifted assets from receiving a 'stepped-up basis,' which would have allowed all appreciation occurring during the donor's ownership to escape income taxation forever. This ruling ensures that appreciation on capital assets is taxed at least once when the asset is eventually sold.

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