Horst characteristic of realization of income to a taxpayer on
the cash receipts basis. 311 U.S. 112 (1940) Realization may occur when he obtains the fruition of the economic gain which has already accrued to him. FACTS: It does not mean that the taxpayer, even on the cash receipts basis, who has fully enjoyed the benefit of the 1. 1934 and 1935: Horst-owner of negotiable bonds (face economic gain represented by his right to receive value of $25,182.50) delivered it as a gift to his son who income can escape taxation because he has not himself in the same year collected them at maturity. received payment of it from his obligor. Hence, income 2. Horst did not include any part of the moneys collected is realized by the assignor who owns or controls the on the coupons in his income tax returns for these two source of the income, also controls the disposition of years. The son included them in his returns. that which he could have received himself and diverts 3. COMMISSIONER: interest payments of negotiable bonds the payment from himself to others. are taxable (Revenue Act of 1934) In this case, Horst procured payment of the 4. CIRCUIT COURT OF APPEALS: reversed the order; as the interest as a valuable gift to a member of his consideration for the coupons had passed to the obligor, family. Such a use of his economic gain, the right the donor had parted with all control over them and to receive income, to procure a satisfaction which their payment. can be obtained only by the expenditure of money or property would seem to be the enjoyment of ISSUE: W/N the bonds (gift) is taxable? YES! the income whether the satisfaction is the purchase of goods at the corner grocery, the HELD: payment of his debt there, or such nonmaterial satisfactions as may result from the payment of a The holder of a coupon bond is the owner of two campaign or community chest contribution, or a independent and separable kinds of right. gift to his favorite son. o 1st: right to demand and receive at maturity the The power to dispose of income is the equivalent of principal amount of the bond representing capital ownership of it. The exercise of that power to procure investment. the payment of income to another is the enjoyment. o 2nd right to demand and receive interim It is the exercise of the power of disposition of the payments of interest on the investment in the interest or compensation with the resulting payment to amounts and on the dates specified by the the donee which is the enjoyment by the donor of coupons. income derived from them. Both are an obligation to pay principal and interest Income derived from an obligation to pay given in exchange for money or property which was interest/compensation: the income of the trust was presumably the consideration for the obligation of the regarded as no more the income of the donor bond. Income-producing property: identified with the Horst had acquired the legal right to demand payment equitable ownership of the property from which alone at maturity of the interest specified by the coupons and the beneficiary derived his right to receive the income the power to command its payment to others which and his power to command disposition of it that a gift of constituted an economic gain to him the income by the beneficiary became effective only as Realization is not deemed to occur until the income is a gift of his ownership of the property producing it. paid. But receipt in cash or property is not the only Moreover, the owner of a negotiable bond and of the fruit is not to be attributed to a different tree from that investment which it represents, stands in the place of on which it grew. the lender. When, by the gift of the coupons, he has Separate opinion of JUSTICE MCREYNOLDS: The separated his right to interest payments from his unmatured coupons given to the son were independent investment and procured the payment of the interest to negotiable instruments, complete in themselves. his donee, he has enjoyed the economic benefits of the Through the gift, they became at once the absolute income in the same manner and to the same extent as property of the donee, free from the donor's control and though the transfer were of earnings. In both cases, the in no way dependent upon ownership of the bonds.