Taft v. Bowers
278 U.S. 470 (1929)

  • Ms. Taft's father bought $1000 worth of stock to give to his daughter. When he finally got around to giving her the shares several years later, they had appreciated and were worth $2000.
  • Ms. Taft sold the shares later for $5000. When she reported the sale to the IRS, there was a disagreement over the initial value (aka the basis) of the stock.
    • Ms. Taft claimed that she had earned $5000 - $2000 = $3000.
      • The value of the stock when her father gave it to her.
    • The IRS disagreed and claimed that she had earned $5000 - $1000 = $4000.
      • The value of the stock when her father bought it.
  • The Trial Court found for Ms. Taft. The IRS appealed.
  • The Appellate Court reversed. Ms. Taft appealed.
  • The US Supreme Court affirmed the Appellate Court and found for the IRS.
    • The US Supreme Court found that there was a specific provision in the tax codes (26 U.S.C. 1015(a)) that said that the recipient of a gift (aka a donee) is responsible for paying taxes for all of the appreciation that occurred since the time the gift was purchased (in this case for $1000).
      • The Court noted that otherwise the appreciation that occurred when the property was still in the hands of the donor would never be taxed.
    • Ms. Taft argued that the 16th Amendment did not grant Congress the authority to enact a tax on gains that occurred before the taxpayer owned the property, but the Court found that there was nothing in the 16th Amendment that forbid it.
  • The idea that tax liability transfers along with the gift is known as the carry over basis rule.