Commissioner v. Giannini

129 F.2d 638 (9th Cir. 1942)

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Nature of the Case

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Facts

H and W were residents of California. H was a director and president of Bancitaly Corporation. From 1919 to 1925 he performed the services of these offices without compensation. In January 1925, the board decided to devise a plan to compensate H. Eventually it was agreed that H would get 5% of the net profits each year with a guaranteed minimum of $100,000 per year commencing in 1927 in lieu of a salary. Prior to the institution of this plan, H was allowed to have the privilege of drawing upon the corporation for his current expenditures. In November 1927, the withdrawal account of H showed a debt to the corporation of $215,603.76, and on that date, his account was credited with salary of $445,704.20 that having been 5% of the net profits from January 1 to July 22, 1927. H then informed the board that he would not accept any further compensation for the year and suggested that the corporation find something worthwhile to do with the money. As a result of that request, the board resolved it would take the $1,500,000 that was due to H and established a foundation at the University of California. The donation was to be made in honor of H and to be named after him. The Regents of the University accepted and eventually the corporation paid over $1,357,607.40, and the balance of $142,393.60 was paid over by H. H and W did not report any of the $1,357,607.40 as part of their income. The IRS assigned the entire amount as income claiming that the actual receipt of money is not necessary for it to be income and that it was the realization of income that created the liability for taxes and that H realized the income when he made the direct disposition that he did and that H did so under the right to get the money, and therefore his disposition was a realization of that income though not received. H argued that he had the right to refuse the money and that his refusal was absolute and unconditional and that such a refusal is an abandonment of the right to property without a transfer of such right to another Since property that is renounced cannot be delivered or assigned and cannot be taxed because it was never received, H claims that he was not liable for taxes on that money. The IRS argues that this was money that H had a contractual right to receive and that any disposition of a contractual right to receive money does not alleviate the tax consequences. H got the ruling, and the IRS appealed.