Respondents Brief — Helvering v. Horst

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No. 27 Oc; 16

CHARLES ELiiunt

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UMPLEY

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IN THE

Supreme Court of the United States

October Term, 1940.

Guy T. Hetverrnc, Commissioner of Internal Revenue,

Petitioner,

against

Pau R. G. Horst,

Respondent.

a

/

On Writ of Certiorari to the United States Circuit

Court of Appeals for the Second Circuit.

cal coepeseneapeneaeaaneniaeea

See SS

BRIEF FOR THE RESPONDENT.

/ Harry H. Wiaaerns,

Attorney for Respondent,

15 Broad Street,

New York.

Szipen Bacon,

Of Counsel.

ee ee oe

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INDEX.

PAGE

OPINIONS BELOW MMPS P Cree Receetets Oc 1

SURMBDIOTION IOP THE COURT... ea cecsceccececnewcecevecencceeseecevese 1

NU OUP TS OO i oo ececcdsesiecenececeevesmerernene 2

SUMMARY OF THE ARGUMENT «................----ccccceesccccccceceescceeeee 4

i 5

Pornt I—Coupons involved are independent nego-

ER GR ea Wee a 5

Point I]—Decision by other tribunals on question

a Soe 6

Point [1I1—Helvering v. Clifford, 309 U. S. 331 inap-

plicable to this case which is in line with Blair v.

Commissioner, 300 U.S. 5 ........ 7

eI acct recep csccecteccceeinblncansentenancacceneees 11

CITATIONS.

Cases #

Bing v. Bowers, 22 F. (2d) 450; aff’d. 26 F. (2d)

Nacht aici tna istctindacoeenRcensentbaneisnaanlcaninaien 3,4

Blair v. Commissioner, 300 U. S. 5 .00...22.2..-.----- 4, 5,7, 10

Burnet v. Leininger, 285 U.S. 136 ........ 3, 4

Clark v. Iowa City, 20 Wall. 583 ........-.-g-----..----0-0---- 5, 8

Clokey v. Evansville € T. H. R. R. Co., 16 6 App. Div. 304 5

Hartman v. Greenhow, 102 U. S. 672... 5, 8

Helvering v. Clifford, 309 U.S. 331 ........-2......- 4,5,7,8

Horst v. Commissioner, 107 F. (2d) 906 ....................-..-.- 1,6

Koshkonong v. Burton, 194 U.S. 668 -.....02.2.-.... 5, 8

I I BI Fc RE sso seers tcoesnyicirmteac ne bescnscereeomns 3,4

Matchette v. Helvering, 81 F. (2d) 73 -..2.222..22.2--22---e0-0-0 3, 6

® Pratt v. Higginson, 230 Mass. 256 .................--..---------e0e0-« 5)

Raymond v. Tiffany, 59 Misc. 283 ...............-..-.------0--0e00-0-0- 8

Reinecke v. Smith, 289 U.S. 172 ~~ :-.--------.--n-ce-cenereveeenee 10

Rosenwald v. Commissioner, 33 F. (2d) 423 -............... 3, 6

Schoonmaker v. Commissioner, 39 B. T. A. 496 -........... 6

Williston v. Commissioner, 2 Mass. A. T. B. 663 -......... 6, 9

Miscellaneous :

IT. T. 3812, C. B. 1989-2, 168 --ccccccccessssocccccceeeesssccnceeeeeee 6, 10

‘

.

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No. 27

IN THE

Supreme Court of the United States

October Term, 1940.

Guy T. Hetvertnc, Commissioner of Internal Revenue,

Petitioner,

against

Pau R. G. Horst,

Respondent.

all

(er

On Writ of Certiorari to the United States Circuit

Court of Appeals for the Second Circuit.

BRIEF FOR RESPONDENT.

Opinions Below.

The opinions below are those of the Board of Tax Ap-

peals, reported in 39 B. T. A. 757, printed in the record

herein at pages 14-19; and that of the Circuit Court of

Appeals, reported in 107 F. (2d) at page 906, printed in

the record herein at pages 26-28.

“

Jurisdiction of this Court.

The jurisdiction of this Court arises under Section

240 (a) of the Judicial Code and this Court’s grant of a

writ of certiorari herein on April 8, 1940.

2

Statement of the Case.

This case presents a single question, arising out of two

income tax returns of the respondent, one for the year 1934,

the other for the year 1935.

On August 10, 1934, the respondent detached from

various coupon bonds he owned negotiable interest coupons

amounting to $25,182.50, maturing respectively from five

to sixteen weeks later, and then made an outright gift of

these coupons to his son, who later in 1934 collected these

coupons as they matured and reported them in his own

return for 1934 as part of his own income for that year

(R. 15).

In 1935 the respondent made a similar gift to his son

of similar unmatured coupons cu‘ »y respondent from

bonds he owned. These 1935 coupens had a par value of

$37,032.50, but only $25,495.00 was collected thereon by

the son, who reported the amount collected therefrom in

his own income tax return for that year (R. 15). t

The respondent, whose returns were made each year

on a cash basis (R. 15), did not report in either year as

part of his own income the amount of these coupons which

he had so given away before their maturity (R. 15).

The Commissioner later assessed deficiencies in income

against the respondent on account of these coupons of

$25,182.50 for 1934 and of $22,360.00° for 1935, on the

* The difference between the $25,495 reported by the son and the $22,360

deficiency assessed against the respondent is apparently due to some offsetting

items credited to the respondent by the Commissioner (R. 15).

3

sole ground that the bonds themselves had not been trans-

ferred to the son with the coupons (R. 6 and 11). Corres-

ponaing deficiencies in tax were assessed by the Commis-

sioner against the respondent of $13,903.09 and interest

for 1934 (R. 12) and of $12,376.20 and interest for 1935

(R. 6).

The respondent petitioned the Board of Tax Appeals

for review of these several deficiency assessments. The

Board statedly declined to follow the decision of the Circuit

Court of Appeals for the Seventh Circuit in Rosenwald v.

Commissioner, 33 F. (2d) 423, an identical case (R. 16);

and sustained the ruling of the Commissioner (R. 18).

Three members of the Board, however, dissented from

its ruling (R. 18-19).

The* respondent then’ appealed to the Circuit Court of

Appeals for the Secord Circuit, which unanimously re-

versed the order of the Board of Tax Appeals.

The Circuit Court of Appeals cited in support of it.

decision the Rosenwald case (33 F. (2d) 423), and its own

earlier decision in Matchette v. Helvering, 81 F. (2d) 73,

and distinguished the cases on which “the petitioner

relied, on the basis that the gift of the eoupons ia this case

was an outright completed gift of a separate piece of prop-

erty, not dependent on any further act of the donor, or

even on the donor’s continuing to hold the bonds. ~

The Court below pointed out, too, that in such cases as

Lucas v. Earl, 281 U. S. 111; Burnett v. Leininger, 285

U. S. 136 and Bing v. Bowers, 22 F. (2d) 450 and 26 F. (2d)

1017, the future income given away was not independent

and completely severed from the principal, as is the case

with the coupons in the case at bar, but was dependent

in each instance on future acts of the donor; in the Lucas

case on his subsequent earnings, in Burnet v. Leininger

on his continuing in a partnership, in Bing v. Bowers be-

cause the donor had given up no interest in the land, had

created no rent charge thereon, and had in fact retained

control over the net income he had purported to grant to

‘another (R. 28).

It mentioned, too, that this Court had itself pointed

out this distinction in Blair v. Commissioner, 300 U. S.

5 (R. 28).

Subsequently this Court decided the case of Helvering v.

Clifford, 309 U. S. 331, on which the petitioner principally

relies, and which seems to us inapplicable to the case at bar.

Summary of the Argument.

The controlling facts in the case at bar are that the

unmatured coupons given outright by the respondent to

his son were independent negotiable instruments; that they

never became income of the respondent, who made his

returns on the cash basis; and that the respondent’s reten-

tion of the bonds, shorn of the coupons, left to the respond-

ent no vestige of ownership or control over the coupons so

given away by him.

The decisions of the two different Circuit Courts of

Appeal which have passed on the point presented agree

that the coupons so given away before maturity are not

income of the donor.

5

The case differs materially in its essentials from that

presented in Helvering v. Clifford, 309 U. S. 331, and the

decision in the case at bar is supported by this court’s

decision in Blair v. Commissioner, 300 'U. S. 5, 11-14.

ARGUMENT.

I.

The coupons given by the respondent to his son

before their maturity were independent negotiable in-

struments complete in themselves, and by the gift

became the absolute property of the donee free from

any control by the donor by reason of his retention

of the bonds from which they had been detached.

Clark v. Iowa City, 20 Wall. 583;

Hartman v. Greenhow, 102 U. S. 672;

Koshkonong v. Burton, 104 U. S. 668;

Clokey v. Evansville € T. H. R. R. Co. 16 App.

Div. 304;

Pratt v. Higginson, 230 Mass. 256.

This long settled doctrine—the controlling feature of

the present case—is dealt with by the petitioner in the most

casual manner by the statement in his brief

“‘The fact that the interest herein was embodied

in separately disposable coupons should not make

any difference.’’ (Petitioner’s Brief, p. 5)

and the subsequent statement:

“We respectfully submit that the difference is a

purely formal one.’’ (Petitioner’s Brief, p. 8)

me

a ne,

6

In our view, this difference between absolute and

merely contingent ownership is both substantial and con-

trolling. And so it has appeared, on another occasion, to

the Commissioner, who ruled in 1939 that a purchaser of

unmatured coupons must pay income tax on whatever he

collected above what he paid for the coupons.

I. T. 3312, C. B. 1939-2, 168.

And in this particular instance the donee reported the

entire amount collected as his income (R. 15).

The two cases on this point in the Circuit Courts

of Appeal agree that coupons so given away before

their maturity are not income of the donor, but of

the donee.

Rosenwald v. Commissioner, 33 F. (2d) 423;

Horst v. Commissioner, 107 F. (2d) 906;

See also, for similar rulings:

Matchette v. Helvering, 81 F. (2d) 73;

Williston v. Commissioner, 2 Mass. A. T. B. 663;

Schoonmaker v. Commissioner, 59 B. T. A. 496;

1. T. 3312, C. B. 1939-2, 168.

ee See ee ee ee

The case at bar does rot come within zhe doctrines

laid down in Helvering v. Clifford, 309 U. S. 331, but

within those declared in Blair v. Commissioner, 300

U. S. 5, 11-14.

c

Subsequent to the decision of the present case by the

Circuit Court of Appeals, this Court handed down its deci-

sion in the case of Helvering v. Clifford, 309 U. S. 331, on

which the petitioner places his main reliance.

Several features of the Clifford case distinguish it

sharply from the case at bar, though apparently these

crucial differences have not impressed counsel for the

petitioner.

In the Clifford case there were the following striking

features, none of which exist in the case at bar:

There was there no separate thing separated and com-

pletely transferred.

What was transferred there, and that only sub modo,

was net income from a trust fund over which Mr. Clifford

retained absolute control. He might easily, under the ex-

tensive powers reserved to himself, invest it in such a

way that there might be no net income therefrom during

the specified period. That was left to his own absolute

discretion. That is a very different thing from an absolute

transfer of a specific coupon.

Moreover, in the Clifford case, Mr. Clifford also re-

tained control even over whatever net income there might

be, under the striking provision that he was to pay over

« to his wife during the continuance of the trust, the whole

8

or such part of the net income as he ‘‘in his absolute dis-

cretion’? might determine. That provision practically

nullified any absolute right on her part to get the income.

Raymond v. Tiffany, 59 Mise. 283.

Any income paid her became a completed gift only when

Mr. Clifford exercised his discretion in her favor, after

the income had been collected by him.

This Court, in its opinion in the Clifford case, further

pointed out that Mr. Clifford ‘‘retained the substance otf

‘full enjoyment of all the rights which previously he had

‘sin the property.’’ (309 U. S. 331, 336.)

As this Court indicated in its opinion in the Clifford

case, it was the combination of all the elements appearing

in that case that constituted the appropriate foundation

for the finding there sustained (309 U. S. 331, 336).

The situation here is radically different. The coupons

given by Mr. Horst were separate negotiable instruments.

Clark v. Iowa City, 20 Wall. 583;

Hartman v. Greenhow, 102 U. S. 672;

Koshkonong v. Burton, 104 U. S. 668.

Mr. Horst had parted with them absolutely and com-

pletely, before their maturity.

His ownership of the bonds, shorn of their coupons,

gave him not the slightest control over the donated coupons.

He could sell or give the bonds, without the donated

coupons, to some third person, and such third person would

have no more control over the donated coupons than lie

himself had. .

He could, if he wished, destroy the bonds from which

the coupons had been clipped, but the coupons would none

the less remain valid in the hands of his donee totally un-

affected by what he did with or to the bonds from which

they had been detached.

In a parallel case before the Massachusetts Appellate

Tax Board under the similar Massachusetts Statute it was

pointed out, orally (as we are informed by counsel in that

case), that if the donor gave the unmatured coupons to one,

and gave the bond without the coupons to another, there

would certainly be difficulty about charging the separate

donee of the bond with the income collected on the coupon,

and no answer to the suggestion was forthcoming.

The Massachusetts Board, in a studied opinion, de-

clined to tax the owner of the naked bonds with the income

received by his donee of the coupons.

Williston v. Commissioner, 2 Mass. A. T. B. 663.

In a footnote to page 9 of his brief, the petitioner sug-

gests, as he suggested orally in the Circuit Court of Ap-

peals, that the donor, if he made his returns on the accrual

basis, might perhaps have been taxed on the accrual on

the coupons up to the time of gift. The answer, of course,

is that he made his returns on the cash basis, and did not

receive any of that accruing income.

It was suggested on the argument of this case before

the Circuit Court of Appeals that this respondent might

have sold the coupons at a discount, and this petitioner

was asked by the Court: ‘‘On what amount would you then

tax him?’’ The answer was, and had to be, on the amount

he got for them. So to the following question: ‘‘And when

10

he got nothing for them, on what would you tax him?”’ the

petitioner had no answer to offer.

The Commissioner had already ruled that the transferee

of the coupon must report as his own income the amount

collected thereon, less what he had paid for the coupon.

I. T. 3312, C. B. 1939-2, 168.

The entire argument for the petitioner seeks to ignore

the fundamental fact that the coupon is a wholly inde-

pendent and separate obligation from the bond, which, when

parted with, is entirely beyond the control of the owner of

the bond.

The retention of some remaining control over the coupon

by the owner of the bond would be of the essence of the

case to bring it within the principles of any of the decisions

on which the petitioner relies. Here the gift was absolute,

leaving no vestige of any such control.

There is but little to add to the argument set forth in

the opinion of the Circuit Court of Appeals.

Counsel for the petitioner have twice quoted a phrase

from this Court’s opinion in Reinecke v. Smith, 289 U. S.

172, 177. The first time they quoted it (on page 5 of their

brief) they omitted the controlling word ‘‘such’’ with

which the phrase opened. The second time (on page 9 of

their brief) they kept the word ‘‘such”’ in, but omitted to

mention what that restrictive word referred to. They

have thus apparently given to that quotation a force which

does not belong to it, and which this Court later rejected

as a misconstruction of it.

Blair v. Commissioner, 300 U. S. 5, 11-14.

11

The case at bar comes directly within that last cited

decision.

IV.

The decision of the Circuit Court of Appeals should

be affirmed.

Respectfully submitted,

Harry H. Wice1ns,

Attorney for Respondent.

SELDEN Bacon,

Of Counsel.

BLANK PAGE

SUPREME COURT OF THE UNITED STATES.

No. 27.—Ocroser Term, 1940.

) On Writ of Certiorari to

the United States Circuit

Court of Appeals for the

Second Circuit.

[November 25, 1940.]

Mr. Justice Stone delivered the opinion of the Court.

Guy T. Hglvering, Petitioner,

vs.

Paul R. G. Horst.

The sole questidn for decision is whether the gift, during the

donor’s taxable year, of interest coupons detached from the bonds,

delivered to the donee and later in the year paid at maturity, is the

realization of income taxable to the donor.

In 1934 and 1935 respondent, the owner of negotiable bonds,

detached from them negotiable interest coupons shortly before their

due date and delivéred.them as a gift to his son who in the same year

collected them at maturity. The Commissioner ruled that under the

applicable § 22 of the Revenue Act of 1934, 48 Stat. 680, 686, the

interest payments were taxable, in the years when paid, to the re-

spondent donor who reported his income on the cash receipts basis.

The circuit court of appeals reversed the order of the Board of Tax

Appeals sustaining the tax. 107 F. (2d) 906; 39 B. T. A. 757. We

granted certiorari, 309 U. S. 650, because of the importance of the

question in the administration of the revenue laws and because of an

asserted conflict in principle of the decision below with that of Lucas

v. Earl, 281 U. S. 111, and with that of decisions by other circuit

courts of appeals. See Bishop v. Commissioner, 54 F. (2d) 298;

Dickey v. Burnet, 56 F. (2d) 917, 921; Van Meter v. Commissioner,

61 F. (2d) 817.

The court below thought that as the consideration for the coupons

had passed to the obligor, the donor had, by the gift, parted with all

control over them and their payment, and for that reason the case

was distinguishable from Lucas v. Earl, supra and Burnet v. Lein-

tnger, 285 U. S. 136, where the assignment of compensation for ser-

vices had preceded the rendition of the sex@ices, and where the in-

come was held taxable to the donor.

2 Helvering vs. Horst.

The holder of a coupon bond is the owner of two independent and

separable kinds of right. One is the right to demand and receive

at maturity the principal amount of tk ‘bond representing capital

investment. The other is the right to demand and receive interim

payments of interest on the investment in the amounts and on the

dates specified by the coupons. Together they are an obligation to

pay principal and interest given ih exchange for money or prop-

erty which was presumably the consideration for the obligation of

the bond. Here respondent, as owner of the bonds, had acquired

the legal right to demand payment at maturity of the interest

specified by the coupons and the power to command its payment to

others which constituted an economic gain to him.

Admittedly not all economic gain of the taxpayer is taxable in-

come. From the beginning the revenue laws have been inter-

preted as defining ‘‘realization’’ of income as the taxable event

rather than the acquisition of the right to receive it. And

‘‘realization’’ is not deemed to occur until the income is paid.

But the decisions and regulations have consistently recognized that

receipt in cash or property is not the only characteristic of realiza-

tion of income to a taxpayer on the cash receipts basis. Where

the taxpayer does not receive payment of income in money or prop-

erty 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. Old Colony Trust Co. v. Commissioner, 279 U. S. 716;

Corliss v. Bowers, 281 U. 8. 376, 378. Cf. Burnet v. Wells, 289 U.S.

670.

In the ordinary case the taxpayer who acquires the right to receive

income is taxed when he receives it, regardless of the time when

his right to receive payment accrued. But the rule that income is

not taxable until realized has never been taken to mean that the

taxpayer, even on the cash receipts basis, who has fully enjoyed the

benefit of the economic gain represented by his right to receive

income, can escape taxation because he has not himself received

payment of it from his obligor. The rule, tounded on administra-

tive convenience, is only one of postponement of the tax to the final

event of enjoyment of the income, usually the receipt of it by the tax-

payer, and not one of exemption from taxation where the enjoyment

is consummated by some event other than the taxpayer’s personal re-

ceipt of money or property. Cf. Aluminum Castings Co. v. Routzahn,

Helvering vs. Horst. 83

282 U. 8. 92, 98. This may occur when he has made such use or dis-

position of his power to receive or control the income as to procure in

its place other satisfactions which are of economic worth. The ques-

tion here is, whether because onc who in fact receives payment for

services or interest payments is taxable only on his receipt of the pay-

ments, he can escape all tax by giving away his right to income in ad-

vance of payment. If the taxpayer procures payment directly to his

creditors of the items of interest or earnings due him, see Old Colony

Trust Co. v. Commissioner, supra; Bowers v. Kerbaugh Empire Co..

271 U. S. 170; Umited States v. Kirby Lumber Co., 284 U. 8. 1, or

if he sets up a revocable trust with income payable to the objects of

his bounty, §§ 166, 167, Revenue Act of 1934, Corliss v. Bowers,

supra; cf. Dickey v. Burnet, 56 F. (2d) 917, 921, he does

not escape taxation because he did not actually receive the money.

Cf. Douglas v. Willewts, 296 U. S. 1; Helvering v. Clifford, 309

U.S. 331.

Underlying the reasoning in these cases is the thought that in-

come 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 from him-

self to others as the means of procuring the satisfaction of his wants.

The taxpayer has equally enjoyed the fruits of his labor or invest-

ment and obtained the satisfaction of his desires whether he collects

and uses the income to procure those satisfactions, or whether he

disposes of his right to collect it as the means of procuring them.

Cf. Burnet v. Wells, supra.

Although the donor here, by the transfer of the coupons, has pre-

eluded any possibility of his collecting them himself he has never-

theless, by his act, procured payment of the interest, as a valuable

gift to a member of his family. Such a use of his economic gain, the

right to receive income, to procure a satisfaction which can be ob-

tained only by the expenditure of money or property, would seem to

be the enjoyment of the income whether the satisfaction is the pur-

chase of goods at the corner grocery, the payment of his debt

there, or such non-material satisfactions as may result from the

payment of a campaign or community chest contribution, or a

gift to his favorite son. Even though he never receives the money

he derives money’s worth from the disposition of the coupons which

he has used as money or money’s worth in the procuring of a satis-

a3 Helvering vs. Horst.

faction which is procurable only by the expenditure’ of money or

money’s worth. The enjoymeat of the economic benefit accruing

to him .by virtue of his acquisition of the coupons is realized as

completely as it would have been if he had collected the interest in

dollars and expended them for any of the purposes named. Burnet

v. Wells, supra.

In a real sense he has enjoyed compensation for money loaned

or services rendered and not any the less so because it is his only

reward for them. To say that one who has made a gift thus derived

from interest or earnings paid to his donee has never enjoyed or

realized the fruits of his investment or labor because he has assigned

them instead of collecting them himself and then paying them over

to the donee, is to affront common understanding and to deny the

facts of common experience. Common understanding and experi-

ence are the touchstones for the interpretation of the revenue laws.

The power to dispose of income is the equivalent of own::rship of

it. The exercise of 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. We have had no difficulty in applying that

proposition where the assignment preceded the rendition of the

services, Lucas v. Earl, supra; Burnet v. Leininger, supra, for it was

recognized in the Leininger case that in such a case the rendition of.

the service by the assignor was the means by which the income was

controlled by the donor and of making his assignment effective.

But it is the assignment by which the disposition of income is con-

trolled when the service precedes the assignment and in both cases

it is the exercise of the power of disposition of the interest or com-

pensation with the resulting payment to the donee which is the

enjoyment by the donor of income derived from them.

This was emphasized in Blair v. Commissioner, 300 U. S. 5,

on which respondént relies, where the distinction was taken between

a gift of income derived from an obligation to pay compensation

and a gift of income-producing property. In the circumstances of

that case the right to income from the trust property was thought

to be so identified with the equitable ownership of the property

from which alone the beneficiary derived his right to receive the

income and his power to command disposition of it that a gift of

the income by the beneficiary became effective only as a gift of his

ownership of the property producing it. Since the gift was deemed

Helvering vs. Horst. 5

to be a gift of the Property the income from it was held to be the

income of the owner of the property, who was the donee, not the

donor, a refinement which was unnecessary if respondent’s conten-

tion here is right, but one clearly inapplicable to gifts of interest or

wages. Unlike income thus derived from an obligation to pay interest

or compensation, the income of the trust was regarded as no more the

income of tle donor than would be the rent from a lease or a crop

raised on a farm after the leasehold or the farm had been given

away. Blair v. Commissioner, supra, 12, 13 and cases cited. See

also Reinecke v. Smith, 289 U. 8. 172,177. We have held without

deviation that where the donor retains control of the trust property

the income is taxable toa him although paid to the donee. Corliss

v. Bowers, supra. Cf. H elvering v. Clifford, supra.

The dominant purpose of the revenue laws is the taxation of in-

come to those who earn or otherwise create the right to receive it

and enjoy the benefit of it when paid. See, Corliss v. Bowers,

supra, 378; Burnet v. Guggenheim, 288 U. 8. 280, 283. The tax

laid by the 1934 Revenue Act upén income ‘‘derived from

a wages or compensation for personal service, of what-

ever kind and in whatever form paid, . . .- ; also from

interest . . . ” therefore cannot fairly be interpreted as not

applying to income derived from interest or compensation wher! 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.

It is the statute which taxes the income to the donor although

paid to his donee. Lucas v. Earl, supra; Burnet v. Lewmnger,

supra. True, in those cases the service which created the right to

income followed the asignment and it was arguable that in point

of legal theory the right to the compensation vested instantaneously

in the assignor when paid although he never received it; while here

the right of the assignor to receive the income antedated the assign-

ment which transferred the right and thus precluded such an in-

stantancous vesting. But the statute affords no basis for such

“‘attenuated subtleties.”’ The distinction was explicitly rejected

as the basis of decision in Lucas v. Earl. It should be rejected here,

for no more than in the Earl case can the purpose of the statute to

tax the income to him who earns, or creates and enjoys it be es-

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6 Helvering vs. Horst.

caped by ‘‘anticipatory arrangements however skilfully devised”’

to prevent the income from vesting even for a second in the donor.

Nor is it perceived that there is any adequate basis for distinguish-

ing between the gift of interest coupons here and a gift of salary

or commissions. The owner of a negotiable bond and of the invest-

ment which it represents, if not the lender, stands in the place of the

lender. When, by the gift of the coupons, he has separated his

right to interest payments from his investment and procured the

payment of the interest to his donee, he has enjoyed the economic

benefits of the income in the same manner and to the same extent

as though the transfer were of earnings and in both cases the

import of the statute is that the fruit is not to be attributed to a

different tree from that on which it grew. See Lucas v. Earl, supra,

115.

Reversed.

A true copy.

Test:

Clerk, Supreme Court, U. 8.

SUPREME COURT OF THE UNITED STATES.

No. 27.—Octossr Term, 1940.

Guy T. Helvering, Petitioner, } 0% Writ of Certiorari to

vs the United States Circuit

Paul R. G. Horst. Court of Appeals for the

Second Circuit.

[November 25, 1940.]

The separate opinion of Mr. Justice McREYNoLps.

The facts were stipulated. In the opinion of the court below the

issues are thus adequately stated—

“‘The petitioner owned a number of coupon bonds. The coupons

represented the interest on the bonds and were payable to bearer.

In 1934 he detached unmatured coupons of face value of $25,182.50

and transferred them by manual delivery to his son as a gift. The

coupons matured later on in the same year, and the son collected

the face amount, $25,182.50, as his own property. There was a

similar transaction in 1935. The petitioner kept his books on a cash

basis. He did not include any part of the moneys collected on the

coupons in his income tax returns for these two years. The son

included them in his returns. The Commissioner added the moneys

collected on the coupons to the petitioner’s taxable income and de-

termined a tax deficiency for each year. The Board of Tax Appeals,

three members dissenting, sustained the Commissioner, holding that

the amounts collected on the coupons were taxable as income to the

petitioner. ’’

The decision of the Board of Tax Appeals was reversed and prop-

erly so, I think. ;

The unmatured coupons given to the son were independent ne-

gotiable instruments, complete in themselves. Through the gift

they became at once the absolute property of the donee, free from

the donor’s control and in no way dependent upon ownership of the

bonds. No question of actual fraud or purpose to defraud the

revenue is presented. ;

Neither Lucas v. Earl, 281 U. S. 111, nor Burnet v. Leiminger,

335 U. S. 136, support petitioner’s view. Blair v. Commissioner, 300

SS ee ae

2 Helvermng vs. Horst. Shinn. :

U. 8. 5, 11, 12, shows that neither involved an unrestricted completed

transfer of property.

Helvering v. Clifford, 309 U. S. 331, 335, 336, decided after the

opinion below, is much relied upon by petitioner, but involved facts

very different from those now before us. There no separate thing

was absolutely transferred and put beyond possible control by the

transferror. The court affirmed that Clifford, both conveyor and

trustee, ‘‘retained the substance of full enjoyment of all the rights

which previously he had in the property.’’ ‘‘in substance his con-

trol over the corpus was in all essential respects the same after the

trust was created as before.’’ ‘‘With that control in his hands he

would keep direct command over all that he needed to remain in

substantially the same financial. situation as before.’’

The general principles approved in Blair v. Commissioner, 300

U. S. 5, are applicable and controlling. The challenged judgment

should be affirmed.

The Curer Justice and Mr. Justice RoBerts concur in this opinion.

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