Horst V Helvering

Facts: Paul Horst was the owner of negotiable bonds with detachable interest coupons. Horst is a cash basis taxpayer and gave the interest coupons to his son prior to the maturity date. His son then collected the coupons at maturity. Horst himself did not report any income tax for the coupons that were given to his son.

Issue: Is the gift of the detachable bonds from Horst to his son considered taxable income to Horst himself or to his son in the year of realization?

Analysis

The courts ruled that under §22 of the Revenue Act of 1934, 48 Stat. 680, 686, the gift was taxable to Horst and not his son in the year paid. The case was brought to the Supreme Court due to an asserted conflict with Lucas v. Earl in which income was assigned to another taxpayer via contractual obligation.

The Supreme Court however, held that since Horst departed from control and payment of the coupons, it was an issue that is distinguishable from Lucas v. Earl. Prior to the gift, Horst had control over both the right to the principal amount at maturity and the detachable interest coupons

The court decided that although he never realized the monetary benefits, he did procure “satisfaction which is procurable only by the expenditure of money or money’s worth.” Essentially if a taxpayer holds the right to dispose of his income rather than collect it, he has indeed realized it and will be subject to taxation.

Holding: Due to the element of control over the detachable interest coupons that Horst retained prior to the gift, the income is taxable to him.