CASE NAME: Helvering v. Horst, 311 U.S. 112, 40-2 USTC [¶ 9787] (1940)
FACTS:
During the 1934 and 1935, Paul Horst owned some negotiable bonds with detachable interest coupons. Just prior the maturity date of the coupons, Horst kept the negotiable bond itself, detached negotiable interest coupon and gave them as a gift to his son, who would be taxed as a lower rate. Then, his son collected the interest coupons at the maturity.
When Horst reported his taxable income, he didn’t include the collection of interest coupons in it. Internal Revenue Service disagreed with his action. Horst argued that his son is the legal owner of the coupon and his son should pay the taxes. However, the IRS argued that the assignment of interest doctrine mentioned that Horst should be the real owner.
ISSUE:
The issue 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.
HOLDING:
The Supreme Court reversed the Court of Appeals and held the Paul Horst should be the legal owner of the coupons and liable for the income tax.
LEGAL ANALYSIS:
There are three important references be discussed in this case. The first one is the coupon bond holder has two independent and separable rights, right to receive and demand principle amount and right to demand and receive interim payments of interest. The second one is the Assignment of Interest Doctrine from Lucas v. Earl (281 U.S. 111 (1930)). And the third one is 26 U.S.C §102(b), which says that gifts of income derived from property are nor excludable
SUMMARIZE THE TAXPAYER’S AND THE GOVERNMENT’S ARGUMENT
The position of taxpayer is the income tax derived from interest coupons, which as a gift, should be paid by donee. The authority to support is two cases, Rosenwald v. Commissioner,