Taft v. Bowers Case Brief

Summary of Taft v. Bowers
Citation: 278 U.S. 470 (1929)

Relevant Facts: Taft was the recipient of stocks by gift from her father. Her father had purchased them several years earlier, and they had increased in value while he held them. The stocks further appreciated following her receipt of the gift from her father. Taft then sold the stocks. The IRS claimed that she was responsible for taxes on the appreciation from the time her father purchased the stocks. While Taft paid what the IRS claimed she owed, she instituted this suit against Bowers, in his official capacity as collector of taxes, and argued that she should only be responsible for the increase in value since the stocks came into her possession. The District Court agreed with Taft, but the Sixth Circuit reversed.

Issue: Under the relevant provisions of the tax code, is a donee responsible for the full increase in value of an asset from the time it was purchased by the donor? Assuming Congress intended to tax donees for the increase in value of an asset from the time it was last purchased, does Congress have the authority to tax assets in that way under the Sixteenth Amendment?

Holding: Yes, the tax code requires donees to step into the shoes of the donor for purposes of calculating the capital basis of the items received by gift. Yes, Congress has the authority to calculate taxes in the manner adopted here.

Reasoning : Justice McReynolds delivered the opinion of the Court. Recounting the facts, he then explained the essence of the case in the abstract. If A acquires stock for $1000, donates the stock to B when it is worth $2000, and B then sells the stock for $5000, is B responsible for taxes on the $4000 increase since A purchased the stocks or the $3000 appreciation since B took possession? Quoting the relevant portion of the tax code, Justice McReynolds explained that the statutory language was clear as to calculating basis. When a donee acquires an item by gift, the “basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift." Thus, the statutory question was an easy one, and Taft’s basis in the stocks was properly calculated by placing her in the shoes of the donor, her father, for purposes of calculating her basis in the asset. Next, the Court determined that Congress had authority to calculate applicable taxes in the manner clearly described in the statute. Congress has authority to tax income derived from any source. The Sixteenth Amendment does not define income. Here, the asset that Taft sold represented a single investment of capital- that made by her father. Had he sold the stocks, he would have been responsible for taxes on the gain. Having given the stocks away instead, the government should not be deprived of income realized since the time of the initial investment. Taft accepted the stocks and should have been aware of the relevant taxation law. The Court found nothing in the Constitution barred Congress from enacting the taxation scheme at issue here, as the contrary view would defeat the essence of taxing a capital gain by arbitrarily setting the date for calculating cost basis at the point which the asset was acquired by gift rather than the last time the asset was acquired through investment of capital. The Court concluded that Congress did not act unreasonably or arbitrarily in setting up the relevant provisions of the tax code, and Taft was deprived of no right through facing taxes on the entire gain in value of the stocks, responsible for the increase in value since the asset was acquired.

Dissent: None.

Conclusion: Congress may set the definition of income for taxation purposes as they see fit. There are no constitutional limitations to taxing capital with basis calculated from the last purchase for value, and Congress unmistakably sought to calculated taxes in this manner.

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