Saturday, May 4, 2013

Cowden v. Commissioner case brief

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Cowden v. Commissioner case brief
289 F.2d 20, 1961 U.S. App. 61-1 U.S. Tax Cas. (CCH) P9382; 7 A.F.T.R.2d (RIA) 1160

CASE SYNOPSIS: Petitioner taxpayers appealed a judgment from the United States Tax Court, which upheld a determination of respondent Commissioner of Internal Revenue to tax a contractual right to receive bonus payments in two subsequent years, on the full value of those payments, at ordinary income rates, in the year of their agreement and assignment.

FACTS: The taxpayers received a contract for oil and gas royalty payments, with bonuses of fixed sums payable in two subsequent years. Six months later, they assigned these contracts to a bank, reporting the amounts they received for these assignments as long term capital gains. The Commissioner argued that these payments represented ordinary income, subject to depletion, to the extent of the fair market value of the obligations at the time they were created, a value which respondent would discount by four percent. The tax court determined that the bonus payments were immediately convertible to cash and should be taxed at full face value with no allowance for depletion.

On appeal, the United States Supreme Court reversed and remanded for a determination whether the bonus obligations were transferable as the equivalent of cash, and what their cash value would have been. If they were cash equivalents, the income would be ordinary income, and would be subject to depletion.

CONCLUSION: The Court reversed the assessment and remanded for a determination as to whether the bonus obligations were taxable in the year of the agreement and assignment as the equivalent of cash.

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