Helvering v. Horst, , is an opinion of the United States Supreme Court which further developed the “fruit-and-tree” metaphor established in Lucas v. Earl

Lucas v. Earl

Lucas v. Earl, 281 U.S. 111 , is a United States Supreme Court case concerning U.S. Federal income taxation, about a man who reported only half of his earnings for years 1920 and 1921. The case addresses the taxpayer's attempt at tax avoidance based on a contract with his wife. The contract...

, . Horst is the leading case that applies the assignment of income doctrine

Assignment of income doctrine

The assignment of income doctrine is a judicial doctrine developed in United States case law by courts trying to limit tax evasion. The assignment of income doctrine seeks to "preserve the progressive rate structure of the Code by prohibiting the splitting of income among taxable...

 to income from property.

Facts

In 1934 and 1935, Paul Horst, the owner of negotiable bonds, detached negotiable interest coupons prior to their due date and gave them as a gift to his son. His son thus collected the interest coupons at maturity. A coupon bond holder owns two independent and separable rights: (1) the right to receive at maturity the principal amount of the bond, and (2) the right to receive interim payments of interest on the investment of the amounts specified by the coupons.

Issue

The issue before the Court was whether the gift of interest coupons, during the donor’s taxable year, detached from the bonds, is considered as the realization of income taxable to the donor.

Holding

The Court held that Paul Horst was liable for income tax on the interest payments received by his son.

Rationale

The Court reasoned that the power to dispose of income is the equivalent of ownership. Because he was able to separate the interest coupons from the bonds and procure payment of the interest to his son, Paul Horst enjoyed the economic benefits of the income. The court stated “. . . . [t]he taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income . . . or whether he disposes of his right to collect it. . . .” The taxpayer cannot attribute the fruit (the interest coupon) to a different tree from that which it grew on (the bond itself). If Horst had given both the bond and the interest coupons to his son, the interest would have been taxable to his son.

Real world impact

Horst has important implications for taxpayers trying to shift their tax burden to another. A taxpayer who is normally taxable only on the receipt of interest payments cannot escape taxation by giving away his right to such income. Furthermore, when assigning income from property to another person (particularly a family member) in the form of a gift, the courts will usually see it as a way to avoid tax and thus consider it “fruit.” Only in an arms-length sale do the courts see the “tree” itself being moved.

See also

• List of United States Supreme Court cases, volume 311
• Salvatore v. Commissioner
  Salvatore v. Commissioner
  Salvatore v. Commissioner is an opinion from the United States Tax Court that holds that a taxpayer cannot avoid paying taxes on the sale of property by first conveying that property to someone else. This opinion was later affirmed by the United States Court of Appeals for the Second Circuit...