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Helvering v.

Horst (1940) (control test)

Doctrines: (from syllabus) the power to procure the payment of income and enjoy the benefit thereof determines who is subject to tax (from the case) The power to dispose of income is equivalent to ownership of it. The exercise of that power, to procure the payment of income to another, is the enjoyment and hence, the realization of income by him who exercises it.

Facts: Horst owned negotiable bonds with detachable negotiable interest coupons, which were payable to bearer. In 1934-1935, he detached two of those coupons, worth around $25k each, and gave them to his son. The interest coupons matured a year after, and his son collected the payment. Horst didnt include the income from the interest coupons as part of his gross income; the IRS disagreed. The Board of Tax Appeals found that Horst, the donor, should pay the income tax on said interest coupons. The circuit court of appeals reversed the Boards decision, so petitioners brought this as a certiorari case seeking to make Horst liable for the income tax. Issues: 1. W/N Horst Sr., as donor, is liable to pay income tax on the interest coupons Held/Ratio: 1. YES, Horst Sr. owned the bonds. Ownership of bonds entails two things: 1) right to be paid the principal amount, and 2) right to be paid interest in installments. Even if he didnt receive direct payment from the interest coupons, it doesnt mean that he didnt realize income from them. He received non-material economic gain when he gave the interest coupons to his son. It doesnt equal monetary payment, but it still equals economic gain represented by his right to receive income. Though the interest coupons hadnt matured yet when he donated them, they were already considered realized income because he exercised his right to transfer the payment to his son. This power to control where the income would go is equal to the realization of income, making it taxable. The power to dispose of income is equivalent to ownership of it. The interest coupons werent considered as gifts that were excludable from income because they were merely part of the entire negotiable bond, which still belonged to Horst. In effect, they derived income from the bond itself, ownership of which remained with Horst.