Taft v. Bowers

Background

A woman received shares of stock from her father that had risen in value while he owned them. She sold the shares in 1923 for more than they were worth when the gift was made. The Government taxed her on the entire gain measured from the donor’s original cost. She paid and sued to recover the portion of the tax that the Government said represented the appreciation that happened before she owned the stock. Lower courts split: the District Court ruled against the Government, while the Court of Appeals sided with the Government.

Reasoning

The central question was whether Congress could make a gift recipient use the donor’s original purchase cost as the tax basis, so the recipient would be taxed on appreciation that occurred before the gift. The Court relied on the Revenue Act of 1921, section 202(2), and accepted the idea that when the increase in value is realized through sale it becomes taxable income. The opinion explained that allowing gifts to defeat taxation on prior appreciation would undermine Congress’s power to tax gains from capital. The Court treated the donee as stepping into the donor’s position for tax purposes and upheld the statutory rule.

Real world impact

The decision means people who get appreciated property by gift can be required to use the donor’s original cost when figuring taxable gain. Recipients may therefore owe tax on increases that happened before they owned the property. The Court affirmed the tax assessment in these cases, leaving this rule in force.