History Lesson

With all of this hoorah going on between Warren Buffett and the other boys who think their tax rate is too low, we are reminded of how we got here – to a day in which long term capital gain income is taxed at a “mere” 15%, presently, versus ordinary income potentially taxed at as high as a 35% rate.  Maybe those gains shouldn’t be taxed at all!

Looking back, there actually was once a school of thought which espoused the notion that what we know as “capital gain income” is not income at all, and should not be taxed one whit!

Check out the 1872 decision of the United States Supreme Court in the case of Gray v. Darlington.  The taxpayer here (Darlington) had bought some U.S. government treasury notes, later selling them at a $20,000 profit.  Needless to say, the Revenooers of the day sought to claim their share, and clipped Darlington for 1,000 bucks (representative of the 5% tax rate which then prevailed).

So, Darlington got his back up and sued for a refund, fighting all the way up to the Supremes – who agreed with him that his refund was due!  Said the Court:  “The question presented is whether the advance in the value of the bonds, during this period of four years, over their cost, realized by their sale, was subject to taxation as gains, profits, or income of the plaintiff for the year in which the bonds were sold.  The answer which should be given to this question does not, in our judgment, admit of any doubt.  The advance in the value of the property during a series of years can, in no just sense, be considered the gains, profits, or income of any one particular year of the series, although the entire amount of the advance be at one time turned into money by a sale of the property.”

So there you have it.

And how about a later decision of the Supremes in its 1918 ruling in Lynch v. Turrish.  In this instance, a corporation sold its valuable assets for cash, and distributed the cash to the stockholders on the surrender of their certificates of stock upon the corporation’s dissolution.  Turrish being one, doubled his money on the deal.

And again, the High Court said that a sum in excess of the par value of corporate stock received by a shareholder…..on sale of the corporate assets and distribution of the proceeds as a final dividend in liquidation of the corporation…..is not taxable income as ‘income, gains or profits’ where it represented an increase in value of the stock resulting from a gradual advance of the corporate property during a series of years…..”

Meanwhile, back at the White House, where the powers that be never met a tax they didn’t like, we hear that a component of Obama’s recently-proposed “American Jobs Act of 2011” would limit the amount of (presently tax exempt) municipal bond interest income which high-income folks could exclude from their income.  It’s only “fair,” don’t you see.

The proposal would cause muni bond income to be taxed at “merely” a 28% rate for joint filers with incomes greater than $250,000, starting in 2013.

And won’t the states and municipalities just be jumping for joy over that idea.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes/

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