SCOTUS Reports

Tag: Reed v. Commissioner

  • Reed v. Commissioner, 141 T.C. 248 (2013): Jurisdiction and Authority in Collection Due Process Hearings

    Reed v. Commissioner, 141 T. C. 248 (U. S. Tax Court 2013)

    In Reed v. Commissioner, the U. S. Tax Court upheld the IRS’s decision to sustain a levy notice against Tom Reed, who failed to file timely tax returns for years 1987-2001. Reed argued that the IRS abused its discretion by not reopening a 2008 offer-in-compromise (OIC) based on doubt as to collectibility. The court clarified its jurisdiction in collection due process hearings and ruled that the IRS cannot be compelled to reopen a previously returned OIC, emphasizing the importance of current financial data in such assessments. This decision reinforces the procedural boundaries of IRS authority in handling tax collection disputes.

    Parties

    Tom Reed, the Petitioner, was the individual taxpayer who failed to file timely Federal income tax returns for the years 1987 through 2001 and subsequently sought to settle his tax liabilities through offers-in-compromise. The Respondent, the Commissioner of Internal Revenue, was represented by the Internal Revenue Service (IRS) and was responsible for the administration and collection of Reed’s tax liabilities.

    Facts

    Tom Reed failed to file his Federal income tax returns timely for the years 1987 through 2001. He later submitted delinquent returns but did not fully satisfy his outstanding tax liabilities. In 2004, Reed submitted his first offer-in-compromise (OIC) to settle these liabilities, proposing to pay $22,000 based on doubt as to collectibility. The IRS rejected this offer, determining that Reed’s reasonable collection potential was higher due to his dissipation of $258,000 from a 2001 real estate sale through high-risk day trading. In 2008, Reed submitted another OIC for $35,196, which the IRS returned as unprocessable because Reed was not in compliance with his current tax obligations. After the IRS issued a final notice of intent to levy, Reed requested a collection due process hearing, during which he contested the handling of his OICs.

    Procedural History

    Reed’s first OIC in 2004 was rejected by the IRS’s Houston Offer in Compromise Unit and upheld on appeal by the Internal Revenue Service Appeals Office in Houston, Texas. His 2008 OIC was returned as unprocessable due to non-compliance with current tax obligations. Following the issuance of a final notice of intent to levy, Reed requested a collection due process hearing, which was conducted by Settlement Officer Liana A. White. After the hearing, White issued a determination notice sustaining the levy notice. Reed then filed a timely petition with the U. S. Tax Court, challenging the determination on the grounds that the IRS abused its discretion by not reopening the 2008 OIC and by rejecting the 2004 OIC. The court reviewed the case de novo, applying an abuse of discretion standard.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the IRS’s determination to sustain a notice of intent to levy when the taxpayer challenges the handling of prior offers-in-compromise?

    Whether the IRS can be required to reopen an offer-in-compromise based on doubt as to collectibility that was returned to the taxpayer years before the collection due process hearing commenced?

    Whether the IRS abused its discretion in sustaining the notice of intent to levy based on its handling of the taxpayer’s 2004 and 2008 offers-in-compromise?

    Rule(s) of Law

    The U. S. Tax Court has jurisdiction over collection due process hearings under 26 U. S. C. § 6330(d) when the Commissioner issues a determination notice and the taxpayer timely files a petition. The IRS has the authority to compromise unpaid tax liabilities under 26 U. S. C. § 7122(a), but an offer-in-compromise must be based on current financial data. An offer-in-compromise may be considered during a collection due process hearing if proposed by the taxpayer, as per 26 U. S. C. § 6330(c)(2)(A)(iii). The IRS may return an offer-in-compromise if the taxpayer fails to meet current tax obligations, as outlined in 26 C. F. R. § 301. 7122-1(f)(5)(ii).

    Holding

    The U. S. Tax Court held that it had jurisdiction to review the IRS’s determination to sustain the notice of intent to levy. The court further held that the IRS cannot be required to reopen an offer-in-compromise based on doubt as to collectibility that was returned to the taxpayer years before the collection due process hearing commenced. Finally, the court held that the IRS did not abuse its discretion in sustaining the notice of intent to levy based on its handling of Reed’s 2004 and 2008 offers-in-compromise.

    Reasoning

    The court reasoned that its jurisdiction to review the IRS’s determination in collection due process hearings is expressly authorized by Congress under 26 U. S. C. § 6330(d). The court rejected the IRS’s argument that it lacked jurisdiction because Reed did not propose a new offer-in-compromise during the hearing, clarifying that the court’s jurisdiction is triggered by the issuance of a determination notice and a timely filed petition.

    Regarding the reopening of the 2008 offer-in-compromise, the court emphasized that such offers must be based on current financial data, as required by 26 U. S. C. § 7122(d)(1) and IRS procedures. The court found that compelling the IRS to reopen an offer based on outdated financial information would impermissibly expand its authority and interfere with the statutory scheme created by Congress.

    The court upheld the IRS’s rejection of the 2004 offer-in-compromise, finding that the inclusion of dissipated assets in calculating Reed’s reasonable collection potential was proper under IRS guidelines. The court also upheld the IRS’s return of the 2008 offer-in-compromise, noting that Reed’s failure to comply with current tax obligations justified the IRS’s action.

    The court concluded that the IRS did not abuse its discretion in sustaining the levy notice, as it verified compliance with legal and administrative requirements, considered all relevant issues raised by Reed, and balanced the intrusiveness of the proposed collection actions against the need for effective tax collection.

    Disposition

    The U. S. Tax Court entered a decision for the respondent, the Commissioner of Internal Revenue, sustaining the final notice of intent to levy.

    Significance/Impact

    Reed v. Commissioner is significant for clarifying the jurisdictional scope of the U. S. Tax Court in collection due process hearings and the IRS’s authority to handle offers-in-compromise. The decision underscores the importance of current financial data in assessing offers based on doubt as to collectibility and reinforces the IRS’s discretion in rejecting or returning such offers. This case impacts taxpayers seeking to settle tax liabilities through offers-in-compromise by emphasizing the need for compliance with current tax obligations and the limited judicial review available for returned offers. Subsequent cases have cited Reed for its analysis of the interaction between 26 U. S. C. §§ 7122 and 6330, further solidifying its doctrinal importance in tax law.

  • Reed v. Commissioner, 141 T.C. No. 7 (2013): Jurisdiction and Discretion in Collection Due Process Hearings

    Reed v. Commissioner, 141 T. C. No. 7 (U. S. Tax Ct. 2013)

    In Reed v. Commissioner, the U. S. Tax Court ruled that it has jurisdiction to review the IRS’s decision to sustain a levy notice, but it cannot compel the IRS to reopen an offer-in-compromise (OIC) that was returned as unprocessable years before a collection hearing. The court affirmed the IRS’s discretion in handling OICs and upheld the levy notice, emphasizing the importance of current financial data in evaluating OICs based on doubt as to collectibility.

    Parties

    Tom Reed, the petitioner, was represented by George W. Connelly, Jr. , Heather M. Pesikoff, and Renesha N. Fountain. The respondent was the Commissioner of Internal Revenue, represented by David Baudilio Mora and Gordon P. Sanz.

    Facts

    Tom Reed failed to timely file Federal income tax returns for the years 1987 through 2001. He later submitted delinquent returns but did not fully satisfy his tax liabilities. Reed made two separate offers-in-compromise (OICs) to settle his outstanding tax liabilities. The first OIC in 2004 was rejected by the IRS, which found that Reed had dissipated real estate proceeds and included them in calculating an acceptable offer amount. The second OIC in 2008 was returned as unprocessable because Reed was not in compliance with current tax obligations. After the IRS issued a final notice of intent to levy, Reed requested a collection due process hearing, arguing that the IRS should reopen the returned 2008 OIC and reconsider the rejected 2004 OIC.

    Procedural History

    Reed’s 2004 OIC was rejected by the IRS, and he appealed to the IRS Appeals Office, which upheld the rejection. His 2008 OIC was returned as unprocessable, and despite Reed’s subsequent attempts to have it reconsidered, the IRS maintained its position. After the IRS issued a final notice of intent to levy, Reed requested a collection due process hearing. The Appeals officer sustained the levy notice, and Reed petitioned the U. S. Tax Court, arguing that the IRS abused its discretion in handling the OICs and sustaining the levy notice.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the IRS’s decision to sustain a levy notice?

    Whether the IRS can be required to reopen an OIC based on doubt as to collectibility that was returned as unprocessable years before a collection hearing commenced?

    Whether the IRS abused its discretion in sustaining the final notice of intent to levy?

    Rule(s) of Law

    The IRS has the authority to compromise unpaid tax liabilities under 26 U. S. C. § 7122(a). Doubt as to collectibility is one ground for compromise, where a taxpayer’s assets and income are less than the unpaid tax liability (26 C. F. R. § 301. 7122-1(b)(2)). The IRS may consider an OIC proposed during a collection hearing under 26 U. S. C. § 6330(c)(2)(A)(iii). However, taxpayers must submit current financial data when proposing an OIC based on doubt as to collectibility.

    Holding

    The U. S. Tax Court held that it has jurisdiction to determine whether the IRS abused its discretion in sustaining the final notice of intent to levy. The court further held that the IRS cannot be required to reopen an OIC based on doubt as to collectibility that was returned to the taxpayer years before the collection hearing commenced. Finally, the court held that the IRS did not abuse its discretion in sustaining the final notice of intent to levy.

    Reasoning

    The court’s reasoning focused on the interaction between 26 U. S. C. § 7122 and § 6330. The court noted that the IRS must evaluate an OIC proposed during a collection hearing based on its authority to compromise unpaid tax liabilities. The court rejected Reed’s theory that the IRS could be compelled to reopen an OIC returned years before a collection hearing, as it would impermissibly expand the IRS’s authority by allowing the evaluation of an OIC based on outdated financial data. The court also found that such a theory would interfere with the statutory scheme by creating additional layers of review for returned OICs. The court upheld the IRS’s decisions on both the 2004 and 2008 OICs, finding that they were based on a reasoned analysis of the facts and applicable law. The court concluded that the IRS did not act arbitrarily, capriciously, or without a sound basis in fact or law in sustaining the levy notice.

    Disposition

    The court entered a decision for the respondent, affirming the IRS’s decision to sustain the final notice of intent to levy.

    Significance/Impact

    Reed v. Commissioner clarifies the scope of the U. S. Tax Court’s jurisdiction in collection due process hearings and the IRS’s discretion in handling OICs. The decision emphasizes the importance of current financial data in evaluating OICs based on doubt as to collectibility and limits the ability of taxpayers to challenge the IRS’s decisions on returned OICs. The case also underscores the IRS’s broad discretion in collection matters and the limited judicial review available to taxpayers in such cases.

  • Reed v. Commissioner, 90 T.C. 698 (1988): Requirements for Depositions to Perpetuate Testimony Before Trial

    Reed v. Commissioner, 90 T. C. 698 (1988)

    To perpetuate testimony before trial under Rule 82, an applicant must demonstrate that the testimony is in danger of being lost before trial.

    Summary

    In Reed v. Commissioner, petitioners sought to depose physicians to preserve testimony regarding the mental state of a testator for potential future litigation over generation-skipping transfers. The U. S. Tax Court denied the request, emphasizing that Rule 82 requires a showing that the testimony is likely to be unavailable at trial. The court found the physicians to be in good health and the case not yet ripe for adjudication, thus not justifying the extraordinary measure of pre-trial depositions. This decision underscores the high threshold for granting pre-trial depositions to perpetuate testimony.

    Facts

    Petitioners, heirs and beneficiaries of a testator’s will, sought to depose two physicians who had treated the testator. The purpose was to preserve testimony about the testator’s mental state and testamentary capacity on specific dates relevant to a potential future tax dispute over generation-skipping transfers. The physicians were middle-aged and in good health, with no immediate threat of unavailability. The underlying tax dispute would only arise if the testator died, an estate tax return was filed, and a deficiency was determined by the respondent.

    Procedural History

    Petitioners filed an Application For Order To Take Depositions Before Commencement of Case under Rule 82 of the Tax Court Rules of Practice and Procedure. A hearing was held, and the matter was taken under advisement. The Tax Court ultimately denied the application.

    Issue(s)

    1. Whether petitioners met the requirements of Rule 82 for taking depositions to perpetuate testimony before the commencement of a case?

    Holding

    1. No, because petitioners failed to demonstrate that the physicians’ testimony was in danger of being lost before trial, a requirement under Rule 82.

    Court’s Reasoning

    The Tax Court emphasized that Rule 82, derived from Rule 27(a) of the Federal Rules of Civil Procedure, is an extraordinary measure intended to prevent the failure or delay of justice. The court applied the test from Gale East, Inc. v. Commissioner, requiring a showing that the testimony would likely be unavailable at trial. The court found that the physicians were middle-aged, in good health, and not subject to any immediate threat of unavailability. The potential for the physicians to move away or for their memories to fade over time was deemed insufficient to meet the Rule 82 standard. The court also rejected a more permissive test from In re Hawkins, as it would render Rule 82 meaningless by allowing depositions for any contemplated lawsuit. The court noted that petitioners could use discovery provisions once a petition is filed or reapply under Rule 82 if the physicians’ availability becomes compromised.

    Practical Implications

    Reed v. Commissioner sets a high bar for granting pre-trial depositions to perpetuate testimony under Rule 82. Attorneys must demonstrate a clear and present danger of testimony being lost before trial, not merely a speculative future risk. This decision impacts how practitioners approach the preservation of evidence in tax cases, particularly when the case’s justiciability is uncertain. It underscores the importance of timing in legal strategy, as parties must wait until a case is ripe for adjudication before seeking to preserve testimony unless extraordinary circumstances exist. Subsequent cases have continued to apply this strict interpretation of Rule 82, affecting both tax litigation and broader civil procedure regarding the perpetuation of testimony.

  • Reed v. Commissioner, 82 T.C. 208 (1984): Exclusion of Housing Allowance for Ministers Limited to Out-of-Pocket Expenses

    Reed v. Commissioner, 82 T. C. 208 (1984)

    Ministers can exclude from gross income only the amount of a housing allowance actually used for out-of-pocket housing expenses, not the full fair rental value of their homes.

    Summary

    The case involved multiple ministers who received housing allowances from Lubbock Christian College, equating to the fair rental value of their homes but exceeding their actual housing costs. The court held that under Section 107(2) of the Internal Revenue Code, these ministers could only exclude the amount of the allowance used for actual housing expenses. The decision clarified that the exclusion under this section is limited to expenditures made in the same year the allowance is received, not the full fair rental value, thus resolving a key issue in tax treatment for ministers’ housing allowances.

    Facts

    The petitioners, ministers at Lubbock Christian College and also part of the Church of Christ, received housing allowances as part of their compensation. These allowances were designated by the college to equal the fair rental value of the ministers’ homes. However, the allowances exceeded the ministers’ actual out-of-pocket expenses for housing. The petitioners sought to exclude the entire fair rental value from their gross income under Section 107(2) of the Internal Revenue Code.

    Procedural History

    The petitioners challenged the Commissioner’s determination of tax deficiencies. The cases were consolidated for trial, briefs, and opinion in the U. S. Tax Court. The court’s decision was that the petitioners could exclude only the amount of the housing allowance used for actual housing expenses.

    Issue(s)

    1. Whether ministers can exclude the fair rental value of their homes from gross income under Section 107(2) when the designated housing allowance exceeds their actual out-of-pocket housing expenses.

    Holding

    1. No, because Section 107(2) limits the exclusion to the amount of the allowance actually used by the minister to rent or provide a home.

    Court’s Reasoning

    The court interpreted Section 107(2) to require a direct correlation between the amount received as a housing allowance and the amount used for housing expenses in the same tax year. The statute specifies that the exclusion applies “to the extent used by him to rent or provide a home,” indicating a use requirement. The court rejected the petitioners’ argument that excluding only out-of-pocket expenses discriminated against ministers without parsonages, noting that Congress deliberately chose different language for Section 107(2) compared to Section 107(1) (which deals with parsonages). The court emphasized that the legislative intent was clear in requiring actual expenditure for the exclusion to apply, and upheld the regulation’s requirement that the use of the allowance must be in the same year it is received.

    Practical Implications

    This decision sets a clear precedent that ministers can only exclude the portion of a housing allowance that directly corresponds to their actual housing costs. This impacts how ministers and their employers calculate taxable income, requiring accurate tracking of housing expenses. It also affects tax planning for religious organizations, as they must ensure housing allowances do not exceed actual costs to avoid unnecessary tax liabilities. Subsequent cases and IRS rulings have followed this interpretation, reinforcing the need for ministers to substantiate their housing expenditures when claiming exclusions under Section 107(2). This case also highlights the distinction between the treatment of housing allowances under Section 107(2) and the provision of parsonages under Section 107(1).

  • Reed v. Commissioner, 55 T.C. 32 (1970): Deductibility of Legal Fees for Title Acquisition and Perfection

    Reed v. Commissioner, 55 T. C. 32 (1970)

    Legal fees and related expenses incurred in acquiring or perfecting title to property are not deductible as ordinary and necessary expenses.

    Summary

    Stass and Martha Reed sought to deduct legal fees incurred in two lawsuits against the Robilios. The first lawsuit aimed to impose a constructive trust and reconveyance of a partnership interest, while the second sought to rescind a partnership agreement restricting the transfer of Martha’s interest. The Tax Court held that these expenses were capital in nature and not deductible under sections 162(a) or 212 of the Internal Revenue Code, as they pertained to the acquisition or perfection of property title rather than the production of income.

    Facts

    Martha Reed inherited a 19. 34% interest in the Robilio & Cuneo partnership from her mother, Zadie. After her father’s estate sold a 30. 66% interest in the partnership to the Robilios, Martha filed a lawsuit seeking to impose a constructive trust on this interest and to rescind a partnership agreement that restricted the transfer of her own interest. The legal fees and related expenses incurred were substantial and were the subject of this tax case.

    Procedural History

    The Reeds filed joint Federal income tax returns claiming deductions for the legal fees and related expenses. The Commissioner of Internal Revenue disallowed these deductions, leading to the Reeds’ appeal to the Tax Court. The Tax Court consolidated the cases for trial, briefing, and opinion.

    Issue(s)

    1. Whether the legal fees and related expenses incurred in attempting to impose a constructive trust and reconveyance of the 30. 66% partnership interest are deductible under section 162(a) or section 212 of the Internal Revenue Code.
    2. Whether the legal fees and related expenses incurred in attempting to rescind the partnership agreement restricting the transfer of Martha’s 19. 34% interest are deductible under section 162(a) or section 212 of the Internal Revenue Code.

    Holding

    1. No, because the expenses were capital in nature, incurred in the process of acquiring title to the 30. 66% interest.
    2. No, because the expenses were capital in nature, incurred in perfecting title to the 19. 34% interest by removing restrictions on its transfer.

    Court’s Reasoning

    The Tax Court applied the “origin-of-the-claim” test, established by the Supreme Court in Woodward v. Commissioner, to determine the deductibility of the legal fees. The court found that the first cause of action aimed at acquiring title to the 30. 66% interest, making the expenses capital in nature. The second cause of action, although not directly affecting Martha’s income interest, sought to perfect her title by removing restrictions on the transfer of her 19. 34% interest, thus also making the expenses capital in nature. The court rejected the Reeds’ arguments that these expenses were for the production of income, citing the Supreme Court’s decisions in United States v. Gilmore and Woodward v. Commissioner as support for the application of the origin-of-the-claim test.

    Practical Implications

    This decision clarifies that legal fees related to acquiring or perfecting title to property are not deductible as ordinary and necessary expenses. Practitioners should advise clients that such expenses must be capitalized rather than deducted. The ruling reinforces the importance of distinguishing between expenses related to income production and those related to capital assets. Subsequent cases have continued to apply the origin-of-the-claim test in determining the deductibility of legal fees, further solidifying its role in tax law.

  • Reed v. Commissioner, 50 T.C. 630 (1968): Definition of ‘Child’ for Dependency Exemption Purposes

    Reed v. Commissioner, 50 T. C. 630 (1968)

    For tax dependency exemptions, ‘child’ is strictly defined as a natural or legally adopted child, not including foster children.

    Summary

    In Reed v. Commissioner, the U. S. Tax Court ruled that foster children do not qualify as dependents for tax exemption purposes if they earn over $600 annually, unless they are the natural or legally adopted children of the taxpayer. The petitioners, Edward and Eloise Reed, sought to claim dependency exemptions for their two foster sons, who were full-time students and earned over $600 each in 1964. The court held that under IRC Section 151(e)(1)(B), only a ‘child of the taxpayer’—defined as a natural or legally adopted child—qualifies for the exemption, excluding foster children not placed for adoption.

    Facts

    Edward and Eloise Reed took two foster sons, Thomas Elston and John Bishop, into their home from the Methodist Children’s Village in Detroit. Thomas had lived with the Reeds for over seven years, and John for about five years. Both boys were 18 years old in 1964 and were full-time students at different institutions. They each earned over $600 that year. The Reeds provided over half of the boys’ support and considered them part of their family, but had agreed not to adopt them, as required by the foster care arrangement.

    Procedural History

    The Reeds filed a joint federal income tax return for 1964, claiming dependency exemptions for Thomas and John. The Commissioner of Internal Revenue determined a deficiency in their taxes, denying the exemptions. The Reeds petitioned the U. S. Tax Court for review of the Commissioner’s determination.

    Issue(s)

    1. Whether Thomas Elston and John Bishop, as foster children, qualify as dependents under IRC Section 151(e)(1)(B), allowing the Reeds to claim a $600 exemption for each, despite the boys earning over $600 in 1964.

    Holding

    1. No, because under IRC Section 151(e)(1)(B), the term ‘child’ is defined to include only natural or legally adopted children, and does not extend to foster children not placed in the home for adoption.

    Court’s Reasoning

    The court analyzed the statutory language of IRC Section 151(e)(1)(B) and Section 152, which define ‘dependent’ and ‘child’. It emphasized that ‘child’ is specifically defined to include only natural children, legally adopted children, and children placed in the home for adoption. The court noted that Congress had provided a separate provision, Section 152(a)(9), for foster children to be claimed as dependents, but only if their earnings were below $600. The legislative history supported this interpretation, showing Congress’s intent to limit the exemption to natural or adopted children when earnings exceeded $600. The court rejected the Reeds’ argument that the term ‘child’ should be interpreted more broadly to include foster children, stating that such an interpretation would constitute ‘judicial legislation’ and was not supported by the statute or its legislative history.

    Practical Implications

    This decision clarifies that foster children, even if treated as part of the family, do not qualify for the dependency exemption under IRC Section 151(e)(1)(B) if they earn over $600 annually, unless they are legally adopted or placed for adoption. Tax practitioners must advise clients that only natural or legally adopted children can be claimed as dependents without regard to the $600 earnings limit. This ruling impacts families with foster children, as they cannot claim the exemption if the foster child’s earnings exceed the threshold. Subsequent cases have followed this interpretation, reinforcing the strict definition of ‘child’ for tax purposes.

  • Reed v. Commissioner, 6 T.C. 455 (1946): Determining the Holding Period for Capital Gains Tax

    Reed v. Commissioner, 6 T.C. 455 (1946)

    The holding period of a capital asset, for purposes of determining capital gains tax, begins when the taxpayer acquires ownership of the asset, not merely when an executory contract for its purchase is formed.

    Summary

    The Tax Court determined that the petitioners’ holding period for stock began on March 28, 1940, when they paid for and received the shares, and not on March 6, 1940, the date of an earlier agreement to purchase the stock. Because the petitioners sold the stock on September 10, 1941, they did not hold it for the required 18 months to qualify for long-term capital gains treatment. The court emphasized that an executory contract to purchase does not vest ownership until the transaction is completed and the stock is transferred.

    Facts

    Earl F. Reed and his associates agreed with Campbell to purchase up to $100,000 worth of Campbell Transportation Co. stock that Campbell was to acquire from John W. Hubbard. Due to Campbell’s financial difficulties, the initial plan was altered. A.E. Dyke acquired 1,250 shares of Hubbard’s stock, with an agreement that Campbell would later acquire a portion of those shares from Dyke for sale to Reed and his associates. On March 28, 1940, Campbell split his own certificate for 1,250 shares and issued several smaller certificates in his name, which he immediately turned over to Reed and his associates, who paid for the shares plus accrued interest from March 6. The petitioners sold the stock on September 10, 1941.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ income tax, contending that the profit from the sale of Campbell Transportation Co. stock was a short-term capital gain. The petitioners argued for long-term capital gain treatment. The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    Whether the petitioners’ holding period for the Campbell Transportation Co. stock began on March 6, 1940 (the date of the purchase agreement), or on March 28, 1940 (the date the shares were transferred and paid for). Whether the sale date was July 31, 1941 (as initially contended by the respondent), or September 10, 1941 (as determined by the court).

    Holding

    1. No, because the petitioners did not acquire ownership of the stock until March 28, 1940, when the shares were transferred and paid for. An executory contract does not constitute ownership. 2. The sale date was September 10, 1941, because that was the date the sale was finalized, as demonstrated by evidence presented in the related case of Albert E. Dyke.

    Court’s Reasoning

    The court relied on the definition of “capital assets” in Section 117(a)(1) of the Internal Revenue Code as “property held by the taxpayer.” Citing McFeely v. Commissioner, 296 U.S. 102, the court stated that “to hold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding.” The court reasoned that prior to March 28, 1940, Reed and his associates only had an executory contract for the purchase of stock, which did not vest title in them. Ownership transferred only when the shares were physically transferred to them on March 28, 1940, and they paid for them. Therefore, the holding period began on March 28, 1940. The court also determined, based on evidence from a related case, that the sale occurred on September 10, 1941, making the holding period less than 18 months.

    Practical Implications

    Reed v. Commissioner clarifies that the holding period for capital gains purposes commences upon acquiring ownership of the asset, not upon the formation of an agreement to purchase. This decision is crucial for tax planning, as it dictates when an investor’s holding period begins, impacting whether gains are taxed as short-term or long-term capital gains. Attorneys and tax advisors must carefully examine the details of asset transfers to accurately determine the start of the holding period. Subsequent cases applying this ruling often focus on pinpointing the exact date of transfer of ownership, considering factors like delivery of the asset and payment of consideration. This case emphasizes the importance of documenting the precise date of asset acquisition to substantiate claims for long-term capital gains treatment.