(Revenue and Taxation) - Meaning of Income.

KEITH BUSINGYE LAW GUIDE.


(MEANING OF INCOME)


CESARINI v. U.S.

District Court of the United States, Northern District of Ohio, 1969.
296 F. Supp. 3, affirmed per curiam 428 F 2d 812. (6th Cir. 1970).

YOUNG, District Judge. This is an action by the plaintiffs as taxpayers for the recovery of income tax payments made in the calendar year 1964. Plaintiffs contend that the amount of $836.51 was erroneously overpaid by them in 1964, and that they are entitled to a refund in that amount, together with the statutory interest from October 13, 1965, the date which they made their claim upon the Internal Revenue Service for the refund.

Plaintiffs and the United States have stipulated to the material facts in the case, and the matter is before the Court for final decision. The facts necessary for a resolution of the issues raised should perhaps be briefly stated before the Court proceeds to a determination of the matter. Plaintiffs are husband and wife, and live within the jurisdiction of the United States District Court for the Northern District of Ohio. 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. In 1964, while cleaning the piano, plaintiffs discovered the sum of $4,467.00 in old currency, and have since retained the piano instead of discarding it as previously planned. 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. 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 year of 1964. 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.

Plaintiffs make three alternative contentions in support of their claim that the sum of $836.51 should be refunded to them. First, that the $4,467.00 found in the piano is not includable in gross income under Section 61 of the Internal Revenue Code. (26 U.S.C.A.S.61). Secondly, even if the retention of the cash constitutes a realization of ordinary income under Section 61, it was due and owing in the year the piano was purchased, 1957, and by 1964, the statute of limitations provided by 26 U.S.C.A R 6501 had elapsed. And thirdly, that if the treasure trove money is gross income for the year 1964, it was entitled to capital gains treatment under Section 1221 of Title 26.
The government, by its answer and its trial brief, asserts that the amount found in the piano is includable in gross income under Section 61(a) of Title 26, U.S.C.A., that the money is taxable in the year it was actually found, 1964, and that the sum is properly taxable at ordinary income rates, not being entitled to capital gains treatment under 26 U.S.C.A. R 1201 et seq.

After a consideration of the pertinent provisions of the Internal Revenue Code, Treasury Regulations, Revenue Rulings, and decisional law in the area, this Court has concluded that the taxpayers are not entitled to a refund of the amount requested, nor are they entitled to capital gains treatment on the income item at issue.
The starting point in determining whether an item is to be included in gross income is, of course, Section 61(a) of Title 26 U.S.C.A. and that section provides in part:
   
    "Except as otherwise provided in this subtitle, gross means all income from whatever source derived, including but not limited to) the following items: * * *" (Emphasis added)
   
Subsections (l) through (15) of Section 61(a) then go on to list fifteen items specifically included in the computation of the taxpayer's gross income, and Part II of Subchapter B of the 1954 Code (Sections 71 et seq.) deals with other items expressly included in gross income. While neither of these listings expressly includes the type of income which is at issue in the case at bar, Part III of Subchapter] Section 101 et seq.) deals with items specifically excluded from gross income and found money is not listed in those sections either. This absence express mention in any of the code sections necessitates a return to the "all income from whatever source" language of Section 61(a and the express statement there that gross income is "not the following fifteen examples. Section 1.61-1(a) of the Treasury Regulations, the corresponding section to Section 61(a) in the 1954 Code, reiterates this broad construction of gross income, providing in part:

"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. ****" (Emphasis added)

The decisions of the United States Supreme Court have frequently stated that this broad all-inclusive language was used by Congress to exert the full measure of its taxing power under the Sixteenth Amendment to the United States Constitution.  Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 429, 75 S.Ct. 473 (1955); Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554 (1940); Helvering v. Midland Mutual Life Ins. Co., 300 U.S 216, 223, 57 S.Ct. 423 (1937); Douglas v. Willcuts, 296 U.S. 1,9, 56 S.Ct. 59 (1935); Irwin v. Gavit, 268 U.S. 161, 166, 45 S.Ct. 475 (1925).
In addition, the Government in the instant case cites and relies upon an I.R.S. Revenue ruling which is undeniably on point:

    "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." Rev Rul. 61, 1953-1, Cum. Bull. 17.

The plaintiffs argue that the above ruling does not control this case for two reasons. The first is that subsequent to the Ruling's pronouncement in 1953, Congress enacted Sections 74 and 102 of the 1954 Code, $ 74, expressly including the value of prizes and awards in gross income in most cases, and $ 102 specifically exempting the value of gifts received from gross income. From this, it is argued that Section 74 was added because prizes might otherwise be construed as non-taxable gifts, and since no such section was passed expressly taxing treasure-trove, it is therefore a gift which is non-taxable under Section 102. This line of reasoning overlooks the statutory scheme previously alluded to, whereby income from all sources is taxed unless the taxpayer can point to an express exemption.

Not only have the taxpayers failed to list a specific exclusion in the instant case, but also the Government has pointed to express language covering the found money, even though it would not be required to do so under the broad language of Section 61(a) and the foregoing Supreme Court decisions interpreting it.

The second argument of the taxpayers in support of their contention that Rev. Rul. 61, 1953-1 should not be applied in this case is based upon the decision of Dougherty v. Commissioner, 10 T.C.M. 320, P-H Memo. T.C., 51,093 (1951). In that case the petitioner was an individual who had never filed an income tax return, and the Commissioner was attempting to determine his gross income by the so-called "net worth" method. Dougherty had a substantial increase in his net worth, and attempted to partially explain away his lack of reporting it by claiming that he had found $31,000.00 in cash inside a used chair he had purchased in 1947. The Tax Court's opinion deals primarily with the factual question of whether or not Dougherty actually did find this money in a chair, finally concluding that he did not and from this petitioners in the instant case argue that if such found money is clearly gross income, the Tax Court would not have reached the fact question, but merely included the $31,000.00 as a matter of law. Petitioners argue that since the Tax Court did not include the sum in Dougherty's gross income until they had found as a fact that it was not treasure trove, then by implication such discovered money is not taxable. This argument must fail for two reasons. First, the Dougherty decision precedes Rev.Rul. 61, 1953-1 by two years, and thus was dealing with what then was an uncharted area of the gross income provisions of the Code. Secondly, the case cannot be read as authority for the proposition that treasure trove is not includable in gross income, even if the revenue ruling had not been issued two years later.

In partial summary, then, the arguments of the taxpayers which attempt to avoid the application of Rev.Rul. 61, 1953-1 are not well taken. The Dougherty case simply does not hold one way or another on the problem before this Court, and therefore petitioners' reliance upon it is misplaced. The other branch of their argument, that found money must be construed to be a gift under Section 102 of the 1954 Code since it is not expressly included as are prizes in Section 74 of the Code, would not even be effective were it being urged at a time prior to 1953, when the ruling had not yet been promulgated. In addition to the numerous cases in the Supreme Court which uphold the broad sweeping construction of Section 61(a) found in Treas.Reg. § 1.61-1(a), other courts and commentators writing at a point in time before the ruling came down took the position that windfalls, including found monies, were properly includable in gross income under Section 22(a) of the 1939 Code, the predecessor of Section 61(a) in the 1954 Code. [See, for example, the decision in Park & Tilford Distillers Corp. v. United States, 107 F.Supp. 941, 123 Ct.Cl. 509 (1952); 2 and Corinent, "Taxation of Found Property and Other Windfalls," 20 U.Ctt.Rev. 748, 752 (1953)].

While it is generally true that revenue rulings may be disregarded by the courts if in conflict with the code and the regulations, or with other judicial decisions, plaintiffs in the instant case have been unable to point to any inconsistency between the gross income sections of the code, the interpretation of them by the regulations and the courts, and the revenue ruling which they herein attack as inapplicable. On the other hand, the United States has shown a consistency in letter and spirit between the ruling and the code, regulations, and court decisions.



Although not cited by either party, and noticeably absent from the Government's brief, the following Treasury Regulation appears in the 1964 Regulations, the year of the return in dispute:

"§ 1.61-14 miscellaneous items of gross income.
    "(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income * * *. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession." (Emphasis added.)
   
Identical language appears in the 1968 Treasury Regulations, and is found in all previous years back to 1958. This language is the same in all material respects as that found in Rev.Rul. 61-53-1, Cum.Bull. 17, and is undoubtedly an attempt to codify that ruling into the Regulations which apply to the 1954 Code. This Court is of the opinion that Treas. Reg. § 1.61-14(a) is dispositive of the major issue in this case if the $4,467.00 found in the piano was "reduced to undisputed possession" in the year petitioners reported it, for this Regulation was applicable to returns filed in the calendar year of 1964.

This brings the Court to the second contention of the plaintiffs: that if any tax was due, it was in 1957 when the piano was purchased and by 1964 the Government was blocked from collecting it by reason of the statute of limitations. Without reaching the question of whether the voluntary payment in 1964 constituted a waiver on the part of the taxpayers, this Court finds that the $4,467.00 sum was properly included in gross income for the calendar year of 1964. Problems of when title vests, or when possession is complete in the field of federal taxation, in the absence of definitive federal legislation on the subject, are ordinarily determined by reference to the law of the state in which the taxpayer resides, or where the property around which the dispute centers is located. Since both the taxpayers and the property in question are found within the State of Ohio, Ohio law must govern as to when the found money was "reduced to undisputed possession" within the meaning of Treas.Reg. § 1.61-14 and Rev.Rul. 61-53-1, Cum.Bull. 17.
   
 In Ohio, there is no statute specifically dealing with the rights of owners and finders of treasure trove, and in the absence of such a statute the common-law rule of England applies, so that "title belongs to the finder as against all the world except the true owner."  Niederlehner v. Weatherly, 78 Ohio App. 263, 69 N.E.2d 787 (1946), appeal dismissed, 146 Ohio St. 697, 67 N. E 2d 713 (1946). The Niederlehner case held, inter alia, that the owner of real estate upon which money is found does not have title as against the finder. Therefore, in the instant case if plaintiffs had resold the piano in 1958, not knowing of the money within it, they later would not be able to succeed in an action against the purchaser who did discover it. Under Ohio law, the plaintiffs must have actually found the money to have superior title over all but the true owner, and they did not discover the old currency until 1964. Unless there is present a specific state statute to the contrary, the majority of jurisdictions are in accord with the Ohio rule. Therefore, this Court finds that 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.





OLD COLONY TRUST CO v. COMMISSIONER

Supreme Court of the United States, 1929
   279 U.S. 716, 49 S.Ct. 499.

Mr. Chief Justice TAFT delivered the opinion of the Court.
   * * *
William M. Wood was president of the American Woolen Company during the years 1918, 1919 and
1920. In 1918 he received as salary and commissions from the company $978,725, which he included in his federal income tax return for 1918. In 1919 he received as salary and commissions from the company $978,725, which he included in his federal income tax return for 1918. In 1919 he received as salary and commissions from the company $548,132,27, which he included in his return for 1919.

August 3, 1916, the American Woolen Company had adopted the following resolution, which was in effect in 1919 and 1920:

    "Voted: That this company pay any and all income taxes, State and Federal, that may hereafter become due and payable upon the salaries of all the officers of the company, including the president, William M. Wood; the comptroller, Parry C. Wiggin; the auditor, George R. Lawton; and the following members of the staff, to wit: Frank H. Carpenter, Edwin L. Heath, Samuel R. Haines, and William M. Lasbury, to the end that said persons and officers shall receive their salaries or other compensation in full without deduction on account of income taxes, State or Federal, which taxes are to be paid out of the treasury of this corporation."

This resolution was amended on March 25, 1918, as follows:

    "Voted: That, in referring to the vote passed by this board on August 3, 1916, in reference to income taxes, State and Federal, payable upon the salaries or compensation of the officers and certain employees of this company, the method of computing said taxes shall be as follows, viz.:
   
    " `The difference between what the total amount of his tax would be, including his income from all sources, and the amount of his tax when computed upon his income excluding such compensation or salaries paid by this company.' "
   
Pursuant to these resolutions, the American Woolen Company paid to the collector of internal revenue Mr. Wood's federal income and surtaxes due to salary and commissions paid him by the company, as follows:
   
Taxes for 1918 paid in 1919     $681,169.88
Taxes for 1919 paid in 1920     $351,179.27

The decision of the Board of Tax Appeals here sought to be reviewed was that the income taxes of $681,169.88 and $351,179.27 paid by the American Woolen Company for Mr. Wood were additional income to him for the years 1919 and 1920.
The question certified by the Circuit Court of Appeals for answer by this Court is:

"Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?"

Coming now to the merits of this case, we think the question presented is whether a taxpayer, having induced a third person to pay his income tax or having acquiesced in such payment as made in discharge of an obligation to him, may avoid the making of a return thereof and the payment of a corresponding tax. We think he may not do so. The payment of the tax by the employers was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor. The form of the payment is expressly declared to make no difference. Section 213, Revenue Act of 1918, c. 18, 40 Stat. 1065. * It is therefore immaterial that the taxes were directly paid over to the Government. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.
The certificate shows that the taxes were imposed upon the employee, that the taxes were actually paid by the employer and that the employee entered upon his duties in the years in question under the express agreement that his income taxes would be paid by his employer. This is evidenced by the terms of the resolution passed August 3, 1916, more than one year prior to the year in which the taxes were imposed. The taxes were paid upon a valuable consideration, namely, the services rendered by the employee and as part of the compensation therefor. We think therefore that the payment constituted income to the employee.

This result is sustained by many decisions. * * *

Nor can it be argued that the payment of the tax * * * was a gift. The payment for services, even though entirely voluntary, was nevertheless compensation within the statute. This is shown by the case of Noel v. Parrott, 15 F.2d 669. There it was resolved that a gratuitous appropriation equal in amount to $3 per share on the outstanding stock of the company be set aside out of the assets for distribution to certain officers and employees of the company and that the executive committee be authorized to make such distribution as they deemed wise and proper. The executive committee gave $35,000 to be paid to the plaintiff taxpayer. The court said, p. 672:

    "In no view of the evidence, therefore, can the $35,000 be regarded as a gift. It was either “compensation for services rendered, or a gain or profit derived from the sale of the stock of the corporation, or both; and, in any view, it was taxable as income."
   
It is next argued against the payment of this tax that if these payments by the employer constitute income to the employee, the employer will be called upon to pay the tax imposed upon this additional income, and that the payment of the additional tax will create further income which will in turn be subject to tax, with the result that there would be a tax upon a tax. This it is urged is the result of the Government's theory when carried to its logical conclusion and results in an absurdity which Congress could not have contemplated.

In the first place, no attempt has been made by the Treasury to collect further taxes, upon the theory that the payment of the additional taxes creates further income, and the question of a tax upon a tax was not before the Circuit Court of Appeals and has not been certified to this Court.

We can settle questions of that sort when an attempt to impose a tax upon a tax is undertaken, but not now. It is not, therefore, necessary to answer the argument based upon an algebraic formula to reach the amount of taxes due. The question in this case is, "Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?" The answer must be "Yes."

COMMISSIONER v. GLENSHAW GLASS CO
Supreme Court of the United States, 1955.
348 U.S. 426, 75 S.Ct. 473, rehearing denied, 349 U.S. 925, 75 S.Ct. 657 (1955).

Mr. Chief Justice WARREN delivered the opinion of the Court.

This litigation involves two cases with independent factual backgrounds yet presenting the identical issue. The two cases were consolidated for argument before the Court of Appeals for the Third Circuit and were heard en banc. The common question is whether money received as exemplary damages for fraud or as the punitive two-thirds portion of a treble-damage antitrust recovery must be reported by a taxpayer as gross income under § 22(a) of the Internal Revenue Code of 1939. In a single opinion, 211 F.2d 928, the Court of Appeals affirmed the Tax Court's separate rulings in favor of the taxpayers. 18 T.C. 860; 19 T.C. 637. Because of the frequent recurrence of the question and differing interpretations by the lower courts of this Court's decisions bearing upon the problem, we granted the Commissioner of Internal Revenue's ensuing petition for certiorari. 348 U.S. 813.The facts of the cases were largely stipulated and are not in dispute. So far as pertinent they are as follows -



Commissioner v. Glenshaw Glass Co.—The Glenshaw Glass Company, a Pennsylvania corporation, manufactures glass bottles and containers. It was engaged in protracted litigation with the Hartford-Empire Company, which manufactures machinery of a character used by Glenshaw. Among the claims advanced by Glenshaw were demands for exemplary damages for fraud and treble damages for injury to its business by reason of Hartford's violation of the federal antitrust laws. In December 1947, the parties concluded a settlement of all pending litigation, by which Hartford paid Glenshaw approximately $800,000. Through a method of allocation which was approved by the Tax Court, 18 T.C. 860, 870-872, and which is no longer in issue, it was ultimately determined that, of the total settlement, $ 324,529.94 represented payment of punitive damages for fraud and antitrust violations. Glenshaw did not report this portion of the settlement as income for the tax year involved. The Commissioner determined a deficiency claiming as taxable the entire sum less only deductible legal fees. As previously noted, the Tax Court and the Court of Appeals upheld the taxpayer.

Commissioner v. William Goldman Theatres, Inc.—William Goldman Theatres, Inc., a Delaware corporation operating motion picture houses in Pennsylvania, sued Loew's, Inc., alleging a violation of the federal antitrust laws and seeking treble damages.
After a holding that a violation had occurred, William Goldman Theatres, Inc. v. Loew's, Inc., 1C0 F.2d 738, the case was remanded to the trial court for a determination of damages. It was found that Goldman had suffered a loss of profits equal to $125,000 and was entitled to treble damages in the sum of $375,000. William Goldman Theatres, Inc. v. Loew's, Inc., 69 F.Supp. 103, aff'd, 164 F.2d 1021, cert. denied, 334 U.S. 811. Goldman reported only $125,000 of the recovery as gross income and claimed that the $250,000 balance constituted punitive damages and as such was not taxable. The Tax Court agreed, 19 T.C. 637, and the Court of Appeals, hearing this with the Glenshaw case, affirmed. 211 F.2d 928.

 It is conceded by the respondents that there is no constitutional barrier to the imposition of a tax on punitive damages. Our question is one of statutory construction: are these payments comprehended by § 22(a)?

The sweeping scope of the controverted statute is readily apparent: -

    “SEC. 22. GROSS INCOME.
        “GENERAL DEFINITION. – “Gross income” includes gains, profits, and
        income derived from salaries, wages, or compensation for personal service
        *** of whatever kind and in whatever form paid, of from professions,
        vocations, trades, businesses, commerce, or sales, or dealings in property,
        whether real or personal, growing out of the ownership or use or interest
        in such property; also from interest, rent dividends, securities, or the
        transaction of any gain carried on for gain or profit, or gains or profits
        and income derived from any source whatever. *** (Emphasis added).

This Court has frequently stated that this language was used by Congress to exert in the field “the full measure of its taxing power.” *** Douglas v. Willcuts, 296 U.S. 1, 9, 55 S.Ct. 346; Irwin v. Gavit, 268 U.S. 161, 166, 45 S.Ct. 475.

Respondents contend that punitive damages, characterized as "windfalls" flowing from the culpable conduct of third parties, are not within the scope of the section. But Congress applied no limitations as to the source of taxable receipts, nor restrictive labels as to their nature. And the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted. Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87-91, 55 S.Ct. 50, 53. Thus, the fortuitous gain accruing to a lessor by reason of the forfeiture of a lessee's improvements on the rented property was taxed in Helvering v. Bruun, 309 U.S 461,60 S.Ct. 631. Cf. Robertson v. United States, 343 U.S. 711, 72 S.Ct. 994, Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571; United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4. Such decisions demonstrate that we cannot but ascribe content to the catchall provision of § 22(a), "gains or profits and income derived from any source whatever. The importance of that phrase has been too frequently recognized since its first appearance in the Revenue Act of 1913 6 to say now that it adds nothing to the meaning of "gross income."


Nor can we accept respondents' contention that a narrower reading of § 22(a) is required by the Court's characterization of income in Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189, as "the gain derived from |capital, from labor, or from both combined.".  The Court was there endeavoring to determine whether the distribution of a corporate stock dividend constituted a realized gain to the shareholder, or changed "only the form, not the essence," of his capital investment.  It was held that the taxpayer had "received nothing out of the company's assets for his separate use and benefit." The distribution, therefore, was held not a taxable event. In that context distinguishing gain from capital the definition served a useful purpose. But it was not meant to provide a touchstone to all future gross income questions. Helvering v. Bruun, supra, at 468 469; United States v. Kirby Lumber Co., supra, at 3.

Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that they compensate for damages actually incurred. It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable but not the additional amount extracted as punishment for the same conduct which caused the injury.  And we find no such evidence of intent to exempt these payments.

It is urged that re-enactment of § 22(a) without change since the Board of Tax Appeals held punitive damages nontaxable in Highland Farms Corp., 42 B.T.A. 1314, indicates congressional satisfaction with that holding. Re-enactment—particularly without the slightest affirmative indication that Congress ever had the Highland Farms decision before it—is an unreliable indicium at best.  Moreover, the Commissioner promptly published his nonacquiescence in this portion of the Highland Farms holding and has, before and since, consistently maintained the position that these receipts are taxable.  It therefore cannot be said with certitude that Congress intended to carve an exception out of § 22(a)'s pervasive coverage. Nor does the 1954 Code's legislative history, with its reiteration of the proposition that statutory gross income is "all-inclusive," give support to respondents' position. The definition of gross income has been simplified, but no effect upon its present broad scope was intended. Certainly punitive damages cannot reasonably be classified as gifts, cf. Commissioner v. Jacobson, 336 U.S. 28, 47-62, 69 S.Ct. 358, 369, nor do they come under any other exemption provision in the Code. We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income. See Helvering v. Midland Mutual Life Ins. Co., supra, at 223.

   

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