Taxes Supreme Court Cases
Article I, Section 8 of the Constitution contains the Taxing and Spending Clause, which allows Congress to “levy and collect taxes…to pay the debts and provide for the common defense and general welfare of the United States.” In general, any American with a gross income over $10,000 ($25,000 for married couples filing jointly) must file a federal income tax return. About half of federal revenue comes from individual income taxes, while less than 10 percent comes from corporate income taxes.
The first tax on personal income was not levied until the Civil War. In 1861, Congress and President Abraham Lincoln imposed a 3 percent tax on annual incomes over $800 to finance the Union war effort. This tax was repealed in 1871, and the Supreme Court struck down a flat rate federal income tax in the 1890s for failing to account for the population of each state. However, the Sixteenth Amendment allowed the federal government to tax individual personal income regardless of state population. The Amendment was ratified in 1913, laying the foundation for modern U.S. taxation under the Internal Revenue Code.
Tax laws are opaque and impose harsh penalties for violations. Vast amounts of money can hinge on nuances in the Internal Revenue Code or federal tax regulations. These are often interpreted by the U.S. Tax Court, a federal trial court established by Congress to review income tax disputes. However, controversies over issues such as the scope of income, exclusions, deductions, income assignment, capital assets, and accounting methods sometimes reach the Supreme Court.
A tax on carriages is not a direct tax, so it does not need to be apportioned among the states according to their respective numbers.
Crandall v. Nevada (1867)
States cannot use their taxing power to impede or embarrass the constitutional operations of the federal government, or the rights that its citizens hold under it.
Head Money Cases (1884)
A tax is uniform under the Constitution when it operates with the same force and effect in every place where the subject of it is found.
Santa Clara County v. Southern Pacific Railroad Co. (1886)
An assessment of a tax is invalid and will not support an action for the recovery of the tax if it is laid on different kinds of property as a unit and includes property not legally assessable, and if the part of the tax assessed on the latter property cannot be separated from the other part of it.
Pollock v. Farmers’ Loan & Trust Co. (1895)
A tax on the rents or income of real estate is a direct tax under the Constitution. Also, a tax on income derived from the interest of bonds issued by a municipal corporation is a tax on the power of the state and its instrumentalities to borrow money and is thus unconstitutional. (This decision was later nullified by the Sixteenth Amendment.)
Brushaber v. Union Pacific Railroad Co. (1916)
The Fifth Amendment is not a limitation on the taxing power conferred on Congress by the Constitution.
Eisner v. Macomber (1920)
Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital.
Bailey v. Drexel Furniture Co. (1922)
An act of Congress that is clearly designed to penalize (and thereby discourage or suppress) conduct that is reserved by the Constitution to be exclusively regulated by the states cannot be sustained under the federal taxing power by calling the penalty a tax.
Taft v. Bowers (1929)
Nothing in the Constitution lends support to the theory that gain actually resulting from the increased value of capital can be treated as taxable income in the hands of the recipient only so far as the increase occurred while they owned the property.
Lucas v. Earl (1930)
The tax law can tax salaries to those who earned them and provide that the tax cannot be escaped by anticipatory arrangements and contracts, however skillfully devised, to prevent the salary when paid from vesting even for a second in the person who earned it.
Burnet v. Sanford & Brooks Co. (1931)
Any system of taxation should produce revenue ascertainable and payable to the government at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment, and collection capable of practical operation. The computation of income annually as the net result of all transactions within the year is a familiar practice.
Burnet v. Logan (1931)
When a taxpayer might never recoup her capital investment from payments only conditionally promised, she properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture.
U.S. v. Kirby Lumber Co. (1931)
When a corporation purchased and retired some of its own bonds for less than their par value, which it had received for them when issued, the difference was a taxable gain or income.
North American Oil Consolidated. v. Burnet (1932)
If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income that he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.
Welch v. Helvering (1933)
Payments on the debts of a corporation, made by its former officer after its discharge in bankruptcy and for the purpose of strengthening their own business standing and credit, were not ordinary and necessary expenses of their business for tax purposes.
Spring City Foundry Co. v. Commissioner (1934)
Keeping accounts and making returns on the accrual basis, as distinguished from the cash basis, import that it is the right to receive, rather than the actual receipt, that determines the inclusion of the amount in gross income. When the right to receive an amount becomes fixed, the right accrues.
Blair v. Commissioner (1937)
A beneficiary of a testamentary trust was not liable for a tax on the income that he had assigned to his children prior to the tax years, and that the trustees had paid to the children. The person who is to receive the income as the owner of the beneficial interest is to pay the tax.
Helvering v. Horst (1940)
The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to someone else is the enjoyment and hence the realization of the income by the party who exercises it.
Hort v. Commissioner (1941)
If a payment was a substitute for rent, which is characterized as gross income, it must be regarded as ordinary income. It is immaterial that, for some purposes, the contract creating the right to such payments may be treated as property or capital.
Murdock v. Pennsylvania (1943)
A state may not impose a tax for the enjoyment of a right granted by the U.S. Constitution.
Dixie Pine Products Co. v. Commissioner (1944)
To truly reflect the income of a given year, all the events must occur in that year that fix the amount and the fact of the taxpayer’s liability for items of indebtedness deducted though not paid. This cannot be the case when the liability is contingent and contested by the taxpayer.
Commissioner v. Flowers (1946)
Traveling expenses of an employee resulting from the fact that they choose for reasons of personal convenience to maintain a residence in a city other than the city in which their post of duty is located are not deductible as travel expenses in pursuit of business.
Crane v. Commissioner (1947)
The amount realized on a sale of property for cash subject to an existing mortgage is the amount of the cash realized plus the amount of the mortgage, even though the seller had acquired the property subject to the mortgage, which they never assumed, and the buyer neither assumed nor paid the mortgage.
U.S. v. Lewis (1951)
When a taxpayer reported an amount received as an employee bonus, and he claimed it in good faith and used it unconditionally as his own, but he was required to return half of the amount to his employer after it was decided that the bonus had been computed improperly, the claim of right doctrine meant that the entire amount was income in the year when it was received, and the taxpayer was not entitled to recompute his tax for that year.
Arrowsmith v. Commissioner (1952)
When a later transaction is sufficiently related to an earlier transaction, the later transaction will be treated as having the same character as the earlier transaction for tax purposes.
Commissioner v. Glenshaw Glass Co. (1955)
Congress has applied no limitations as to the source of taxable receipts, nor restrictive labels as to their nature. Punitive damages are income because these are undeniable accessions to wealth, clearly realized, and over which taxpayers have complete dominion.
Corn Products Refining Co. v. Commissioner (1955)
Congress intended that profits and losses arising from the everyday operation of a business should be considered as ordinary income or loss, rather than capital gain or loss.
Commissioner v. P.G. Lake, Inc. (1958)
Consideration received for an assignment of an oil payment right was taxable as ordinary income, rather than a long-term capital gain, when the present consideration received by the taxpayer was paid for the right to receive future income, rather than for an increase in the value of the income-producing property.
Flora v. U.S. (1958)
A taxpayer must pay the full amount of an income tax deficiency assessed by the Commissioner of Internal Revenue before they may challenge its correctness in a suit for refund.
Commissioner v. Duberstein (1960)
For exclusion purposes, a gift in the statutory sense proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity, or similar impulses. What controls is the intention with which payment, however voluntary, has been made. There must be an objective inquiry as to whether what is called a gift amounts to it in reality.
Commissioner v. Gillette Motor Transport, Inc. (1960)
When a trucking company received compensation from the government for the fair rental value of its facilities during a period when they were controlled by the government, this was ordinary income rather than a capital gain that resulted from an involuntary conversion of capital assets consisting of real or depreciable personal property used in its trade or business.
Knetsch v. U.S. (1960)
A transaction was a sham when it did not appreciably affect the taxpayer’s beneficial interest except to reduce their tax. In other words, there was nothing of substance to be realized by the taxpayer from the transaction beyond a tax deduction.
James v. U.S. (1961)
Embezzled money is taxable income of the embezzler in the year of the embezzlement.
American Automobile Ass’n v. U.S. (1961)
When an accounting method presents an accurate image of the total financial structure but fails to respect the criteria of annual tax accounting, it may be rejected by the Commissioner even if it was in accordance with generally accepted commercial accounting principles and practices.
U.S. v. Gilmore (1963)
The origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences on the fortunes of the taxpayer, is the controlling basic test of whether the expense was business or personal, and thus whether it is deductible under Section 23(a)(2) of the Internal Revenue Code.
Schlude v. Commissioner (1963)
It was proper for the Commissioner to include as income of a dance studio in a particular year advance payments by way of cash, negotiable notes, and contract installments falling due but remaining unpaid during that year.
Commissioner v. Brown (1965)
It does not follow from the fact that there was no risk-shifting from seller to buyer that a transaction was not a sale but instead a device to collect future earnings at capital gains rates for which the price set was excessive.
U.S. v. Correll (1967)
Traveling expenses incurred in the pursuit of business while away from home, which are deductible, include the cost of meals only if the trip requires sleep or rest.
U.S. v. Skelly Oil Co. (1969)
Under Section 1341 of the Internal Revenue Code, the deduction allowable in the year of repayment must be reduced by the percentage depletion allowance granted to the taxpayer in the years of receipt as a result of the inclusion of the later-refunded items in their “gross income from the property” in those years. The tax law should not be interpreted as allowing a deduction for refunding money that was not taxed when it was received.
Walz v. Tax Commission of City of New York (1970)
Granting property tax exemptions to religious organizations for properties used solely for religious worship did not violate the Establishment Clause of the First Amendment.
Commissioner v. Kowalski (1977)
The exclusion under Section 119 of the Internal Revenue Code covers meals furnished by the employer, but not cash reimbursements for meals.
Frank Lyon Co. v. U.S. (1978)
When there is a genuine multiple-party transaction with economic substance that is compelled or encouraged by business or regulatory realities, that is imbued with tax-independent considerations, and that is not shaped solely by tax-avoidance features to which meaningless labels are attached, the government should honor the allocation of rights and duties effectuated by the parties.
Diedrich v. Commissioner (1982)
A donor who makes a gift of property on condition that the donee pay the resulting gift taxes realizes taxable income to the extent that the gift taxes paid by the donee exceed the donor’s adjusted basis in the property.
Commissioner v. Tufts (1983)
When a taxpayer sells or disposes of property encumbered by a non-recourse obligation exceeding the fair market value of the property sold, they may be required to include in the “amount realized” the outstanding amount of the obligation. The fair market value of the property is irrelevant to this calculation.
Bob Jones Univ. v. U.S. (1983)
To warrant exemption under Section 501(c)(3), an institution must fall within a category specified in that section, and it must demonstrably serve and be in harmony with the public interest. The institution’s purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred.
U.S. v. Hughes Properties, Inc. (1986)
The “all events” test requires that before an expense can be regarded as “incurred” for federal income tax purposes, a liability must be fixed and absolute. Identification of the payee may be irrelevant if the obligation to pay exists. The event creating liability is the event that fixes the amount irrevocably.
Commissioner v. Groetzinger (1987)
To be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity, and the taxpayer’s primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.
U.S. v. General Dynamics (1987)
When the filing of claims is a condition precedent to liability, an accrual-basis taxpayer providing medical benefits to its employees cannot deduct at the close of the taxable year an estimate of its obligation to pay for medical care obtained by employees or their qualified dependents during the final quarter of the year, claims for which have not been reported to the employer.
Arkansas Best Corp. v. Commissioner (1988)
A taxpayer’s motivation in purchasing an asset is irrelevant to the question of whether it falls within the broad definition of “capital asset” in Section 1221 of the Internal Revenue Code.
Commissioner v. Indianapolis Power & Light Co. (1990)
When a utility company required customers with suspect credit to make deposits with it to assure prompt payment of future electric bills, the deposits were not advance payments for electricity and were not taxable income to the utility company upon receipt. The company did not have the requisite complete dominion over them when they were made, which is the crucial point for determining taxable income.
Cheek v. U.S. (1991)
Statutory willfulness, which protects the average citizen from prosecution for innocent mistakes due to the complexity of the tax laws, is the voluntary, intentional violation of a known legal duty. A good-faith misunderstanding of the law or a good-faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable.
Cottage Savings Ass’n v. Commissioner (1991)
The gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. Properties are materially different if their respective possessors enjoy legal entitlements that are different in kind or extent.
Gitlitz v. Commissioner (2001)
Excluded discharged debt is an item of income, which passes through to shareholders and increases their bases in an S corporation’s stock.
Jones v. Flowers (2006)
When mailed notice of a tax sale is returned unclaimed, a state must take additional reasonable steps to attempt to provide notice to the property owner before selling their property.
U.S. v. Windsor (2013)
The federal estate tax exemption for surviving spouses must be available to same-sex partners.
Comptroller of Treasury of Maryland v. Wynne (2015)
A state must offer its residents a full credit against the income taxes that they pay to other states.
South Dakota v. Wayfair, Inc. (2018)
State taxes will be sustained so long as they apply to an activity with a substantial nexus with the taxing state, are fairly apportioned, do not discriminate against interstate commerce, and are fairly related to the services that the state provides.