Ms. Taft's father bought $1000
worth of stock to give to his daughter. When he finally got around to
giving her the shares several years later, they had appreciated and were
worth $2000.
Ms. Taft sold the shares later
for $5000. When she reported the sale to the IRS, there was a
disagreement over the initial value (aka the basis) of the stock.
Ms. Taft claimed that she
had earned $5000 - $2000 = $3000.
The value of the stock when
her father gave it to her.
The IRS disagreed and
claimed that she had earned $5000 - $1000 = $4000.
The value of the stock when
her father bought it.
The Trial Court found for Ms.
Taft. The IRS appealed.
The Appellate Court reversed.
Ms. Taft appealed.
The US Supreme Court affirmed
the Appellate Court and found for the IRS.
The US Supreme Court found
that there was a specific provision in the tax codes (26 U.S.C.
§1015(a)) that said that the
recipient of a gift (aka a donee) is responsible for paying
taxes for all of the appreciation that occurred since the time the gift
was purchased (in this case for $1000).
The Court noted that
otherwise the appreciation that occurred when the property was still in
the hands of the donor would never be taxed.
Ms. Taft argued that the 16th
Amendment did not grant Congress the
authority to enact a tax on gains that occurred before the taxpayer owned
the property, but the Court found that there was nothing in the 16th
Amendment that forbid it.
The idea that tax liability
transfers along with the gift is known as the carry over basis rule.
