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Cesarini v US

The Cesarinis bought a used piano for $15.


Seven years later, they found $4,467 hidden in the piano.
The money was legally theirs based on the treasure trove concept Property Law.
The Cesarinis initially reported the $4k as income and paid taxes on it.
Later on, they changed their mind and filed an amended return requesting a refund.
Internal Revenue Service (IRS) rejected the Cesarinis' claim.
The Cesarinis argued that:

The $4k was not gross income.


The IRS had a revenue ruling that said, "the finder of a treasure trove is in receipt of taxable
income.
The Appellate Court affirmed.
WON the money found is considered gross income, therefore, taxable.
YES.
The Court found that all increases of wealth is considered income, unless otherwise indicated.
Nothing is excluded unless specifically authorized.
Gross income means all income from whatever source derived encompasses all accessions to
wealth, clearly realized, and over which the taxpayers have complete dominion. That includes
finding it in a piano.
A "treasure trove constitutes gross income for the taxable year in which it is reduced to
undisputed income."
DOCTRINE:
The Court found that all increases of wealth is considered income.
Gross income means all income from whatever source derived encompasses all accessions to
wealth, clearly realized, and over which the taxpayers have complete dominion. That includes
finding it in a piano.
A "treasure trove constitutes gross income for the taxable year in which it is reduced to
undisputed income."

Ames v Commissioner

Petitioner Ames was charged in the U.S. District Court, Eastern Virginia on charges of
conspiracy to commit espionage and conspiracy to defraud the U.S. Internal Revenue Service.

Petitioner pleaded guilty to both charges.


It was alleged that he held a position with the Central Intelligence Agency (CIA) of the United

States when he turned over state secrets to Soviet Union.


In 1984, as part of his duties as a CIA Operations officer, petitioner began meeting with officials
of the Soviet Union's Embassy in Washington, D.C.
After his return to Washington, D.C., in 1989, petitioner communicated with the Soviets primarily
through a complex arrangement (e.g. a prearranged location, prearranged message, secretly
leaving packages for anonymous pickup).
Petitioner and his wife then made deposits of cash received in connection with petitioner's
unlawful espionage activities (during years 1989, 1990, 1991, and 1992).
Petitioner however did not report on a Federal income tax return any amount of unlawful income
he received.
Petitioner argues that most of the amounts he received during the taxable years 1989-1992 were
constructively received in 1985.
Therefore, he is not required to report them during 1989-1992.

WON Petitioner is required to report the income he received during 1989-1992.

YES
A taxpayer reporting income on the cash method of accounting, such as petitioner, must include

an item in income for the taxable year in which the item is actually or constructively received.
The concept of constructive receipt is well established in tax law.
Income although not actually reduced to a taxpayer's possession is constructively received by
him in the taxable year during which it is credited to his account or made available to him.
Evidenced by the facts of the case, petitioner did not constructively receive the income in 1985.
It was made physically and/or practically available to him during years 1989-1992.

Commissioner v. Indianapolis Power & Light Co.


Respondent Indianapolis Power & Light Co. (IPL), a regulated Indiana utility, requires customers
having suspect credit to make deposits with it to assure prompt payment of future electric bills.
Prior to termination of service, customers who satisfy a credit test can obtain a refund of their
deposits or to have it applied against future bills.
IPL does not treat them as income at the time of receipt but carries them on its books as current
liabilities.
Petitioner Commissioner of Internal Revenue (CIR) asserted deficiencies, claiming that the
deposits are advance payments for electricity and therefore are taxable.
The Tax Court ruled in favor of IPL holding that the deposits' principal purpose is to serve as
security rather than as prepayment of income.
The Court of Appeals affirmed.
WON the deposits are taxable.
NO
Supreme Court noted that undeniable accessions to wealth over which the taxpayers have
complete dominion constitute income.
The customer deposits are not advance payments for electricity and therefore do not constitute
taxable income to IPL.
Although IPL derives some economic benefit from the deposits, it does not have the requisite
"complete dominion" over them at the time they are made, the crucial point for determining taxable
income.
IPL has an obligation to repay the deposits upon termination of service or satisfaction of the
credit test.

Raytheon Production Corporation v Commissioner

Raytheon sued Radio Corporation of America (RCA) for an anti-trust issue related to some
patent claims. They won a $410k settlement.

The details of the anti-trust case were complicated but essentially


Out of the $410k Raytheon received, they estimated the value of the patents at $60k. They filed
taxes claiming the $60k as gross income and excluding the remaining $350k.

The IRS claimed that the $350k that Raytheon received for the settlement of the suit was also
taxable as gross income.
Raytheon argued that it wasn't gross income at all, but a replacement of capital, which was not
taxable.
The Appellate Court found for the Raytheon.
WON the awarded damages be considered a taxable income in this case.
YES.
The Court suggested that the question to ask was, "in lieu of what were the damages awarded."

If the damages were for loss of profits due to an injury on your business (like say someone
breaks your finger and you can't perform in that concert so you don't get paid for playing), then the
damages are a substitute for lost profit and are taxable as gross income.

On the other hand, if the damages were for loss of a capital item (like say someone burns
down your house and pays to build you a new house), then the damages are to replace what you
lost (aka replacement capital), and are not taxable as gross income.
This is now known as the Substitution Theory.
However, the Court found that when RCA reimbursed Raytheon for the loss of a business unit,
that was basically the equivalent of RCA buying the business unit from Raytheon.
The Court found that the payment made to Raytheon is taxable because it was made in excess of
reimbursement.
Tax law does not exempt compensatory damages just because they are a return of capital
exemption applies only to the portion that recovers the cost basis of that capital.
Any excess damages serve to realize prior appreciation, and should be taxed as income.