A Bundle of Confusion for the Income Tax: What It Means to Own Something

ABSTRACT-Conceptions of property exist on a spectrum between the Blackstonian absolute dominion over an object to a bundle of rights and obligations that recognizes, if not encourages, the splitting of property interests among different people. The development of the bundle of rights conception of property occurred in roughly the same era as the enactment of the modern federal income tax. Nevertheless, when Congress enacted the tax in 1913, it did not consider how the nuances of property, and the possible splitting of the property interests in an income-producing item, might affect application of the tax. Soon after the tax's enactment, the Treasury Department and the courts were confronted with questions of who owned, and could be taxed on, what income. As shown by an examination of family partnerships and synthetic leases, the government continues to struggle with determining who owns a sufficient property interest to be taxed because Congress has yet to define ownership for tax purposes.I. FROM BLACKSTONE TO BUNDLESSir William Blackstone made famous the conception of property as "that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe."1 This vision of property attributes to the owner almost total control. Despite the resonance of this Blackstonian ideal, truly despotic ownership over property has never been possible. Society demands constraints on what owners are allowed to do with their property; and many owners sell or give away some, but not all, rights to their property. Today Blackstone's view of property as a solitary thing-owned and controlled by one-is a fiction, although one that continues to have political power. Instead, we divide some attributes of ownership here, we limit some rights there, each of these responses to modern life flying in the face of our Blackstonian conception of property.If Blackstone could impose his view of property on the United States today, the income tax could be easily and fairly applied. Whoever owned a piece of property, and only one person could, would be taxed on the income that the property produced. Property owners' ability to convey away limited rights to property complicates this story. Congress did not consider this complication when it drafted the 1913 income tax, notwithstanding growing understanding in many quarters that property was a "bundle of rights."2 In roughly the same period as the modern income tax's enactment, policymakers began to realize that different people could have different rights to portions of property. Nevertheless, Congress imposed on the tax a conception of property consistent with the earlier Blackstonian vision.Property as an abstract compilation of different types of rights could be, and often was, owned by different people. To the extent that property was owned by more than one person, whether what a person owned was appropriate to be taxed was open to debate. Despite this issue, Congress originally ignored the potential complexity of ownership when it taxed the income "of" an individual.3 That phrasing presupposed Blackstone's understanding of ownership, and for a significant period of time no one felt the need to determine ownership for tax purposes.4 That this fundamental issue was ignored might not be surprising in the world of congressional politics when income tax rates were low and the amount of revenue it raised was small compared to the other federal taxes. Nevertheless, the failure of Congress to grapple head-on with this issue of taxation in the midst of an evolving understanding of ownership has resulted in legal confusion and costly litigation over the application of the federal income tax.Soon after the 1913 income tax's enactment, the Treasury Department was confronted with numerous tax returns, the tax liability of which turned on the ownership of property. In the early decades of the income tax, the potential to fracture ownership was contested most often with respect to family property (as many of the business arrangements and financial products that currently utilize complex ownership structures were not yet imagined). …