Court Opinion

ID: 4474023
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:42.924958+00
Date Added: 2024-06-11T12:48:25.235226
License: Public Domain

Chabot, J., dissenting: The majority opinion sets forth supra note 3 and the accompanying text (majority op. p. 407) concerns as to the injustice resulting from the intersection of court-made doctrine and statute law — in particular the minimum tax. The majority opinion states that “these policy issues are in the province of Congress”, majority op. p. 407, and refuses to modify court-made doctrine. Although I agree with the majority that “we are not authorized to rewrite the statute”, majority op. p. 407, I reject the idea that we are disabled from correcting court-made error, and so I dissent. The assignment of income doctrine was created by the courts to deal with situations where the taxpayer figuratively turned his or her back on income that would have come to and been taxable to the taxpayer, but for the taxpayer’s effort to shift the receipt and taxability of the income. See the three seminal opinions cited by the majority (majority op. p. 415) — Lucas v. Earl, 281 U.S. 111 (1930) (husband assigned to wife half of salary and fees that he earned; Federal taxing statute treats assigned amounts as taxpayer’s income); Helvering v. Eubank, 311 U.S. 122 (1940) (taxpayer assigned to corporate trustees insurance renewal commissions; taxpayer remains taxable on the insurance renewal commissions he had earned); Helvering v. Horst, 311 U.S. 112 (1940) (taxpayer assigned to son negotiable bond interest coupons; taxpayer remains taxable on the income that he would have received but for the transfer). The Supreme Court made clear that these results were based on the Court’s reading of the statute as to what was income of the taxpayer rather than income of another; the intended result was to tax the taxpayer on the income the taxpayer would have had if he or she had acted to “earn” the income but had not acted to deflect the income. Those seminal cases did not present disputes about the amount of the income, but they focused on whether the taxpayer had succeeded in deflecting the taxation of it to others. As the majority opinion notes, there is later case law dealing with how to measure the amount of the income. This case law is, in part, responding to needs to interpret and apply intricate “spread-back” provisions and, in part, to fill in the gaps in statutory text that become evident when a statute has to be applied to the real world. The concepts developed by the courts seemed to be reasonable and seemed to produce reasonable results. However, the statutory background has changed over the decades. For example, the Congress repealed more than 30 years ago the statute referred to in the majority opinion’s quotation (majority op. p. 411) from O’Brien v. Commissioner, 38 T.C. 707, 710 (1962), affd. 319 F.2d 532 (3d Cir. 1963). Application of court-made rules to the new background has exposed analytical errors that were originally overlooked because the harm created was not then regarded as serious. That is, we held that the taxpayers in O’Brien v. Commissioner, supra, and in Cotnam v. Commissioner, 28 T.C. 947 (1957), revd. on this issue and affd. on other issues 263 F.2d 119 (5th Cir. 1959), were entitled to some but not all of the relief they claimed from the general application of the annual accounting period rules.8  The spread-back provisions that were the foundations for Smith, Cotnam, and O’Brien were repealed by the Revenue Act of 1964, Pub. L. 88-272, sec. 232(a), 78 Stat. 19, 105, effective for taxable years beginning after Dec. 31, 1963. See Pub. L. 88-272, sec. 232(g)(1), 78 Stat. 112. However, as the majority opinion notes (majority op. p. 407), continued application of the court-made rules in this era of minimum tax can raise effective tax rates to hardship levels in some real-world instances. The problem arises not from the statute, but rather from the court-made elaboration of the assignment of income doctrine and from our refusal to reexamine the rules that we have devised. I agree with the majority that the Congress has the power to revise the statute to reduce or eliminate the effect of court-made errors, but the courts also have the right and obligation to correct their own errors. In Teschner v. Commissioner, 38 T.C. 1003 (1962), a majority of this Court reexamined several of the seminal cases, rejected respondent’s efforts to analyze by slogan,9 and determined that the taxpayer therein was not taxable on the prize that his daughter received as a result of the taxpayer’s successful entry in a contest. Under the rules of the contest, only persons under the age of 17 years and 1 month were eligible to receive prizes. See id. at 1004. Any contestant over that age was required to designate a person below that age as the recipient of the prize. See id. at 1004. The taxpayer designated his daughter as recipient. See id. at 1005. The taxpayer did not play any part in creating this restrictive rule. Although the contest was described as a “Youth Scholarship Contest”, the contest rules did not limit the daughter in her use of the prize, a fully paid-up annuity policy. See id. at 1005. The prize was worth $1,287.12; respondent included this amount in the taxpayer’s income and determined a deficiency of $283.16. See id. at 1004, 1005. We summarized our conclusion as follows, id. at 1009: Granted that an individual cannot escape taxation on income to which he is entitled by “Turning his back” upon that income, the fact remains that he must have received the income or had a right'to do so before he is taxable thereon. As noted by the court in United States v. Pierce, 137 F.2d 428, 431 (C.A. 8, 1943): The sum of the holdings of all cases is that for purposes of taxation income is attributable to the person entitled to receive it, although he assigns his right in advance of realization, and although, in the case of income derived from the ownership of property, he transfers the property producing the income to another as trustee or agent, in either case retaining all the practical benefits of ownership. Section 1(a) of the 1954 Code imposes a tax on the “income of every individual.” Where an individual neither receives nor has the right to receive income, he is not the taxable individual within the contemplation of the statute. There is no basis in the statute or in the decided cases for a construction at variance with this fundamental rule. Reviewed by the Court. Decision will be entered for the petitioners. The majority in the instant case tax to petitioners substantial funds that petitioners did not receive, were never entitled to receive, and never turned their backs on. They do so in the name of the assignment of income doctrine. The majority acknowledge that there may be injustice in so doing, and that the injustice may well be even greater in other real-life settings than in the instant case. They contend that precedents compel them to this result and that relief can come only from the hills (Psalm 121), or at least from Capitol Hill. But this Court has shown in Teschner v. Commissioner, supra, that reexamination of the origins of the assignment of income doctrine can sharpen our understanding of the concepts and make more rational the application of that doctrine. We do not lightly overrule our prior decisions. But when experience and analysis show that we have departed from the origins that we once thought to be the foundations of those decisions, and when it is our judicial interpretations and not the statute law that lead to results that increasingly seem to be unjust, then we ought to reexamine the foundations of the doctrine. See in this connection Phillips v. Commissioner, 86 T.C. 433 (1986), affd on this issue and revd. on another issue 851 F.2d 1492 (D.C. Cir. 1988). We should not declare ourselves incapable of self-correction, merely because we chose to follow a wrong path decades ago. Respectfully, I dissent. Parr, Wells, Colvin, and Beghe, JJ., agree with this dissenting opinion.   The statute referred to in O’Brien v. Commissioner, 38 T.C. 707, 710 (1962), affd. 319 F.2d 532 (3d Cir. 1963), is sec. 1303, I.R.C. 1954, which provided a “cap” on taxation of backpay awards, calculated by “spreading back” the award over the years to which the awarded amounts were attributable. We held that the gross award was to be spread back, unreduced by the taxpayer’s costs of obtaining the award. We noted that the taxpayer merely was being denied a special, limited relief from the normal incidences of income taxation, and that he remained entitled to deduct his legal fees for the year the award was made. See O’Brien v. Commissioner, 38 T.C. at 710, 712. In O’Brien v. Commissioner, 38 T.C. at 711, we relied on Smith v. Commissioner, 17 T.C. 135 (1951), revd. on another issue 203 F.2d 310 (2d Cir. 1953), in which we had ruled the same way under sec. 107(d), I.R.C. 1939, the predecessor of sec. 1303, I.R.C. 1954. In Smith v. Commissioner, 17 T.C. at 144, the taxpayer wanted the gross award spread back and the expenses deducted for the year of the award, while the Commissioner argued for spreading back the net cost; we held for the taxpayer. In Cotnam v. Commissioner, 28 T.C. 947, 953-954 (1957), revd. on this issue and affd. on other issues 263 F.2d 119 (5th Cir. 1959), we also held that the gross award was to be spread back under sec. 107(d), I.R.C. 1939, and the expenses deductible for the year of the award.    In Teschner v. Commissioner, 38 T.C. 1003, 1007 (1962), we explained as follows: In his ruling, the respondent declared, “The basic rule in determining to whom an item of income is taxable is that income is taxable to the one who earns it.” If by this statement the respondent means that income is in all events includible in the gross income of whomsoever generates or creates the income by virtue of his own effort, the respondent is wrong. If this were the law, agents, conduits, fiduciaries, and others in a similar capacity would be personally taxable on the proceeds of their efforts. The charity fund-raiser would be taxable on sums contributed as the result of his efforts. The employee would be taxable on income generated for his employer by his efforts. Such results, completely at variance with every accepted concept of Federal income taxation, demonstrate the fallacy of the premise. If, on the other hand, the respondent used the term “earn,” not in such a broad sense, but in the commonly accepted usage of “to acquire by labor, service, or performance; to deserve and receive compensation” (Webster’s New International Dictionary),4 then the rule is intelligible but does not support the conclusion reached by the respondent either in the ruling in question or in the case before us. The taxpayer there, as here, acquired nothing himself; he received nothing nor did he have a right to receive anything.    Cf. Cold Metal Process Co. v. Commissioner, 247 F.2d 864, 872 (C.A. 6, 1957).