International Freighting Corporation, Inc. v. Commissioner
135 F.2d 310 (2d Cir. 1943)

  • IFC was a subsidiary of another company (DuPont). When it came time to give their employees bonuses, IFC gave out shares of DuPont stock.
    • IFC gave out stock worth $24,858 at the time it was given to the employees.
    • That same stock only cost $16,153 to acquire from Dupont.
  • When it came time to pay taxes, there was a disagreement on how much of a deduction IFC could claim as a business expense.
    • IFC claimed a deduction of the value of the stock ($24,858).
      • IFC argued that the employees who got the stock had to pay taxed on the full $24,858 of value, so they should be allowed to deduct an equal amount.
    • The IRS argued that the deduction should only be the cost of the stock ($16,153).
      • The IRS argued that the value should be calculated as the cost to IFC, not the market value.
  • The Tax Court came to a split decision. IFC appealed.
    • The Tax Court found that the deduction should be the market value of the stock ($24,585).
    • However, the Court found that since IFC got something for $16,153 which had a final market value of $24,585, they had a net gain of $8,705, which they needed to pay taxes on.
  • The Appellate Court affirmed.
    • The Appellate Court agreed that the market value at the time of delivery ($24,585) was properly deducted as a business expense.
    • The Court found that since IFC gave out $24,585 of stock that they only paid $16,153 for, they clearly had made a gain of $8,705, which was taxable as gross income.