University of Montana School of Law

Haines, Harry A.

Montana Law Review
Volume 24
Issue 2 Spring 1963 Article 8
January 2063
Teschner v. Commissioner, 38 T.C. ... no. 101
(1962)
Harry A. Haines
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Recommended Citation
Harry A. Haines, Teschner v. Commissioner, 38 T.C. ... no. 101 (1962), 24 Mont. L. Rev. (1962).
Available at: https://scholarship.law.umt.edu/mlr/vol24/iss2/8
RECENT DECISIONS
employee to sue his employer under section 301 when the collective bar-
gaining agreement contains no grievance arbitration procedure. Further-
more, by impliedly refusing to determine the right of an employee to sue
his employer under section 301 for breach of an agreement containing
grievance arbitration procedure, the Court has indicated that it has not
abandoned its view that industrial peace is best obtained by the enforce-
ment of collective bargaining agreements.
KEMP J. WILSON
TAXPAYER WHO GENERATES INCOME AND DESIGNATES ITS RECIPIENT
HELD NOT TAXABLE THEREON WHEN HE HAS No RIGHT TO RECEIVE IT.-
Taxpayer entered a contest under rules which required contestants over the
age of seventeen years and one month to designate persons under that age
as recipients of any prizes won. Taxpayer, an adult, designated his daugh-
ter and his entry subsequently won. The daughter received an annuity
policy payable to her at age eighteen without restriction as to the use of
the proceeds. Taxpayer did not include the amount of the prize in his in-
come tax return and the Commissioner determined a deficiency for the
amount excluded. The United States Tax Court held that a taxpayer who
generates income and designates its recipient is not taxable thereon when
he has no right to receive it. Tesckner v. Commissioner, 38 T.C -......no  101
(1962) (two justices concurring) (seven justices dissenting).
Prior to 1954 the courts expressed divergent views as to who should
be taxed on prizes and awards.' With the enactment of section 74 of the
1954 Internal Revenue Code "amounts received as prizes and awards" were
expressly included in the gross income of the recipient.' In the instant case
the question before the court was whether a taxpayer who entered a con-
test and won a prize could be taxed upon it even though, under the rules
of the contest, he could not receive the prize.'
'Compare Pauline C. Washburn, 5 T.C. 1333 (1945) ("Pot 0' Gold" case) ; McDer-
mott v. Comm'r, 150 F.2d 585 (D.C. Cir. 1945) (Ross Essay contest) ; Glenn v. Bates,
217 F.2d 535 (6th Cir. 19 5 4 )'(car giveaway) ; with Herbert Stein, 14 T.C. 494 (1950)
and Robertson v. United States, 343 U.S. 711 (1952).
2INT. REv. CODE, § 74: Prizes and Awards.
"(a) General Rule.-Except as provided in subsection (b) and in section 117
(relating to scholarships and fellowship grants), gross income includes amounts re-
ceived as prizes and awards.
"(b) Exception.-Gross income does not include amounts received as prizes and
awards made primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement, but only if-
"(1) the recipient was selected without any action on his part to enter
the contest *or proceeding; and
"(2) the recipient is not required to render substantial future services as a
condition to receiving the prize or award."
There was no question in the instant case as to whether the prize constituted tax-
able income. The sole question was whether taxpayer should be taxed upon it. In-
stant case at 3. Under section 74 of the INT. Rzv. CODE the recipient of the prize
is taxed. From the facts in the instant case it would seem that the daughter should
be taxed. Instant case at 7. See infra note 33.
1963]
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Haines: Teschner v. Commissioner
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MONTANA LAW REVIEW
The courts, in determining to whom income should be taxed, have not
formulated a broad standard which can be applied to every situation. Vari-
ous factors are considered controlling, dependent upon the situation before
the court.' In the instant case three factors controlled the court's determi-
nation: (1) the source of the income; (2) the control of the taxpayer over
the source of the income (primarily, the taxpayer's right to receive the in-
come) ;' and (3) the benefit and enjoyment which taxpayer receives from
the use of the income.
The difficulty in determining the source of income is illustrated by
Helvering v. Horst." In that case the taxpayer, an owner of negotiable
bonds, detached from them negotiable interest coupons and gave them to
his son who in the same year collected on them at maturity. The majority
of the Court held that the source of the income was the investment in the
bonds, whereas the dissent contended that it was the coupons themselves.
The majority looked to the act which generated or produced the income
rather than to the instrument with which it was produced. This position
is consistent with the established rule that income is taxable to the one who
earns it." "To earn" in its broadest sense means to generate or produce
income,' and the act generating or producing the income is its source. How-
ever, generation of income, by itself, is not sufficient to establish the lia-
bility of a taxpayer for the tax upon it.'
Control over the source of income must also be considered in determin-
ing to whom it is taxable. Control presupposes that the taxpayer at one
time was entitled to receive the income or was able to designate himself as
the recipient.* In the Marion Stone Burt Lansill case the United States
Tax Court said that :'
The right in the taxpayer to receive the income at the time it is at-
tributed and taxed to him is likewise not essential, where . .. the
taxpayer has by his own volition chosen to dispose of the right to
receive income while retaining that from which the income is de-
rived. The volition in disposing of the right is important, for while
all will agree that one who has never received or had a right to re-
ceive or who has involuntarily lost it should not be taxed, it is also
plain that his voluntary exercise of the right to dispose of the in-
come before receipt may be just as valuable and important prac-
tically as its exercise after receipt. (Emphasis supplied.)
"If a taxpayer is liable for the tax on income, hereinafter such income is referred
to as "taxable income." For a discussion of all the terms used in determining the
liability of a taxpayer for the tax on income see Williamson, Fruition of Potential
Income-contingent or Realized, TAxES, Vol. 40, No. 8.5Instant case at 3, 4, 5, 6, 7, and 8.
6311 U.S. 112 (1940).
"Compare Rev. Rule 58-127 with instant case at 4.
aInstant case at 4. The majority in the instant case preferred two other definitions
of "to earn", both of which came from WEBSTER'S NEw INTERNATIONAL Dio'rxoNAay :(1) "to acquire by labor, service, or performance"; (2) "to deserve or receive com-
pensation." A discussion of the applicability of these definitions appears later.
*The Hor8t case, suprcp note 6, recognized that control over the income, benefit and
enjoyment received are also important and did not divorce the question of the
source of Income from the other two factors. However, for the purpose of clarifica-
tion, the factors shall be distinguished in this discussion.
'Marion Stone Burt Lansill, 17 B.T.A. 413 (1929) aff'd 58 F.2d 512 (D.C. Cir. 1932);
Poe v. Seaborn, 282 U.S. 101, 117 (1930) ; United States v. Pierce, 137 F.2d 428, 431
(8th Cir. 1943) ; Harrison v. Shaffner, 312 U.S. 579, 580, 582 (1941).
u17 B.T.A. 413, 423 (1929).
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Montana Law Review, Vol. 24 [1962], Iss. 2, Art. 8
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RECENT DECISIONS
While control over the source of income further presupposes that the tax-
payer has the power to dispose of it, his exercise of this power, standing
alone, will not justify taxing him on the income.' For example, if a tax-
payer assigns the source of income to another and retains no control over it,
the assignment will relieve him of the tax upon income thereafter gen-
erating from the source.' However, if his continued control over the source
is necessary to maintain the flow of income to the assignee, a valid assign-
ment will not relieve him of the tax."'
The benefit and enjoyment which a taxpayer receives from the use of
income is a factor in determining whether the income is taxed to him when
he does not actually receive it. The Supreme Court recognized this prin-
ciple when it stated :'
The rule that income is not taxable until realized... is only one of
postponement of the tax to the final event of enjoyment of the in-
come, usually the receipt of it by the taxpayer, and not one, of ex-
emption from taxation where the enjoyment is consummated by
some event other than the taxpayer's personal receipt of money or
property. This may occur when he has made such use or disposi-
tion of his power to receive or control the income as to procure in
its place other satisfactions which are of economic worth. (Em-
phasis supplied.)
The term "satisfaction" has been used in at least three different situations
involving the taxation of income: (1) where a taxpayer exercises his
power to dispose of income in such a way as to receive personal satisfaction
from it;' (2) where a taxpayer uses income which he would otherwise re-
ceive to satisfy an obligation which he owes to another;1 and (3) where an-
other person pays a debt for the taxpayer's benefit.' In all three instances
it has been held that the taxpayer has received economic worth or "satis-
faction" and that he should be taxed on the income.
In the instant case all of the judges agreed that the taxpayer's entry
in the contest was the act that produced the income which subsequently was
received by his daughter.' However, the majority refused to apply, in
its broadest sense, the rule that income is taxable to the one who earns it."
It instead defined the phrase "to earn," as meaning "to acquire by labor,
service, or performance" or "to deserve or receive compensation." " Wheth-
"For a discussion of the principle that the power to dispose of income does not create
liability for the tax upon it see 1946-1 Cum. BuLTL at 19-21, T.D. 5488. Compare
Nicholas A. Stavroudes, 27 T.C. 583, 590 (1956).
"3Helvering v. Seatree, 72 F.2d 67 (D.C. Cir. 1934) ; Comm'r v. Ross, 83 F.2d 18 (6th
Cir. 1936) ; Mitchell v. Comm'r, 27 B.T.A. 101 (1932), Contra, Stack v. Comm'r, 22
B.T.A. 707 (1931).
"'Rossmore v. Comm'r, 76 F.2d 520 (2d Cir. 1935) ; Daugherty v. Comm'r, 63 F.2d
77 (9th 01r. 1933).
ISupra note 6 at 116.
"E.g., taxpayers creates a revocable trust with income to objects of his bounty. See
Corlis v. Bowers, 281 U.S. 376 (1930).
"'E.g., payment of the income to satisfy an alimony obligation. See Douglas v. Will-
cuts, 296 U.S. 1 (1935).
"8ld Colony Trust Co. v. ,Comm'r, 279 U.S. 716 (1929); United States v. Boston &
Maine R.R., 279 U.S. 732 (1929).
'Instant case at 4, 8.
21Id. at t
Oid. at 4, 5.
1963]
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Haines: Teschner v. Commissioner
Published by The Scholarly Forum @ Montana Law, 1962
MONTANA LAW REVIEW
er "to earn" is used in its broadest sense or is given the definition used
by the majority, the underlying assumption is that income can only be taxed
to a taxpayer who at one time was entitled to receive it.' Under this ra-
tionale the taxpayer in the instant case would not be taxable on the income
regardless of how "to earn" is defined.
All of the judges in the instant case further agreed that the taxpay-
er's designation of his daughter was not in discharge of an obligation to
support.' Satisfaction of such an obligation renders a taxpayer taxable
because he receives economic worth from the use of the income." By desig-
nating his daughter as recipient of the income, the taxpayer in the instant
case did not receive economic worth since the designation was not made
to satisfy an obligation.
The minority and majority of the court in the instant case disagreed
as to whether the taxpayer had sufficient control over the income to be
taxed upon it. The majority correctly recognized that control over the
source of the income necessarily involves the right in the taxpayer to receive
the income.' The minority, on the other hand, contended that the right to
receive the income is not necessary ' and relied heavily upon the doctrine
announced in Lucas v. Earl' that an anticipatory assignment of income to
be earned does not relieve the taxpayer of the tax upon it.
In the Earl case a husband and wife contracted to place into joint
tenancy all of their property then owned or that was subsequently acquired.
Assuming the contract to be valid, the court held that income thereafter
earned by the husband was attributable to him for income tax purposes
notwithstanding the contract because, as Mr. Justice Holmes stated; "no
distinction can be taken according to the motive leading to the arrange-
ment by which the fruits are attributed to a different tree from that on
which they grew. '" Consequently, if a taxpayer, by any anticipatory ar-
rangement, channels income earned or to be earned to another, he does not
escape the tax upon it.
In the instant case the dissent recognized the rule of the Earl case that
an anticipatory assignment of income to be earned does not relieve the
taxpayer of the tax upon it. However, it sought to extend the application
of this rule to situations where a taxpayer had no right to receive the in-
come. The minority contended that a taxpayer's receipt of economic worth
does not depend upon his right to receive income. Therefore, when he gen-
erates income and disposes of it in such a way as to receive economic worth,
he is taxable on it. '
"Supra note 10.21Instant case at 4.
'Payment in satisfaction of an obligation is recognized as amounting to taxable in-
come. See supra notes 16, 17. In Douglas v. Willcuts, 296 U.S. 1, 9 (1935), the court
stated: "We have held that income was received by a taxpayer, when, pursuant to
a contract, a debt or other obligation was discharged by another for his benefit.
The transaction was regarded as being the same in substance as if the money had
been paid to the taxpayer and he had transmitted it to his creditor." The same
result and reasoning follows when a taxpayer channels income to satisfy an obliga-
tion owed by the taxpayer to another.2'Instant case at 5, 6, 7.
2 Id. at 8.
"281 U.S. 111 (1930).
2 'Id. at 115.
nInstant case at 8.
[Vol. 24,
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Montana Law Review, Vol. 24 [1962], Iss. 2, Art. 8
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RECENT DECISIONS
In the instant case, under the rationale of the dissent, it would appear
that the three factors considered heretofore are present. The source of
the income, i.e., the act which generates it, was the entry of the taxpayer
into the contest. Control over the source of the income is found in the tax-
payer's designation of income to his daughter. Finally, the taxpayer re-
ceived economic worth by designating his daughter as the person to receive
the income.
However, the rationale of the dissent fails when the Horst case is read
in connection with Poe v. Seaborn.' In the Seaborn case Mr. Justice Rob-
erts stated that "The very assignment in that case (referring to the Earl
decision) was bottomed on the fact that the earnings would be the hus-
band's property else there would have been nothing on which it could
operate."' This qualification of the Earl case was more explicitly stated
in Helvering v. Horst where Mr. Justice Stone, writing for the majority,
said that:'
[T]he rule that income is not taxable until realized has never been
taken to mean that the taxpayer . . . who has fully enjoyed the
benefit of the economic gain represented by his right to receive in-
came, can escape taxation because he has not himself received pay-
ment of it from his obligor. (Emphasis supplied.)
It is submitted that the majority is correct in its conclusion that a tax-
payer must have a right to receive income which he generates before he can
be taxed upon it. If a taxpayer has no right to receive the income, he does
not have sufficient control over it to justify taxing him. He could in no
way use the income for his own economic benefit. Further, this position
will not deprive the United States of revenue inasmuch as someone will be
taxed upon the income in such situations. Under the facts in the instant
case, it would appear that the daughter is taxable on the income which she
received."
HARRY A. HAINES
FAILURE TO APPEAL FROM REVERSAL OF VARIANCE GRANTED FOR NON-
CONFORMING USE UNDER ZONING ACT PRECLUDES CLAIM OF AGRICULTURAL
ExEMPTION.-Pursuant to the Montana County Planning and Zoning Act,'
defendant and other landowners signed a zoning petition giving the Board
of County Commissioners authority to creat a zoning district. The district
' Supra note 10.
'Poe v. Seaborn, 282 U.S. 101, 117 (1930).
'Supra note 6 at 116.
MThe daughter does not come within the exception of section 74 of the INT. REv. CODE.
The exception in that section allows Nobel prize winners and Pulitzer prize winners
tax free income. See, H. Rept., No. 1337, 83d Cong., 2d Sess., pp. 11, A27 (1954) ;
S. Rept., No. 1622, 83d Cong., 2d Sess., pp. 13, 179 (1954). Although the daughter
falls within a different income bracket than another with higher income, In theory
the United States is not deprived of the revenue.
REvISED CODES OF MONTANA, 1947, §§ 16-4101 to 4107. Hereinafter REVIsED COES
OF MONTANA are cited R.C.M.
1963]
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