Commissioner v. Giannini

Brief Fact Summary. Taxpayer had a right to 5% of net profits of a corporation for which he was a Director and President. After receiving a large sum for the first half of a year, he refused any remaining compensation for that year.

Synopsis of Rule of Law. A taxpayer may realize income when he is able to direct its disposition even though he never received it directly.

Facts. Taxpayer was a Director and President of Bancitaly Corporation from 1919 until its dissolution. From 1919 to 1925 he performed services for the corporation without compensation. The Board of Directors authorized a compensation plan and allowed him to get expenditures paid by the corporation. The compensation plan consisted of a minimum of $100,000 per year plus 5% of net profits each year. For the first half of 1927 5% of the profits came to $445,704.20. Taxpayer refused any further compensation above that for the year. The 5% profits for the remainder of the year came to $1.5 million and the Board decided to donate that to the University of California to set up a Foundation of Agricultural Economics. Taxpayer and his wife did not report any of the donation on their tax return. The Commissioner of Internal Revenue found a deficiency arguing that the amount should have been reported as income by taxpayer and his wife. The Board of Tax Appeals reversed.

Issue. Should the money be counted as income of Taxpayer despite his attempt to divest himself of any rights to it?

Held. Circuit Judge Stephens issued the opinion for the United States Ninth Circuit Court of Appeals in affirming the Board of Tax Appeals and holding that the money was not “beneficially received by the taxpayer” and should not count as income.

Concurrence. Circuit Judge Healy issued a concurrence but it is omitted from the text.

Discussion. The Court of Appeals found that the Taxpayer did not receive the money and he did not direct how it was to be used. He only wanted the corporation to keep it and use it as they saw fit. There was no evidence that Taxpayer was attempting to commit fraud or trying to avoid tax consequences.