## Facts

- Two taxpayers received corporate stock as gifts after December 31, 1920, and later sold the shares for more than their sale-date value at the time of the gifts.
- The donors had purchased the shares for less than their fair market value at the time of the gifts; the shares had appreciated while held by the donors.
- Upon the donees’ sales, the federal government computed taxable gain using the donors’ cost as the basis, pursuant to § 202(a)(2) of the Revenue Act of 1921 (carryover basis for gifts).
- The donees conceded that appreciation occurring after the gifts could be taxed to them, but argued that taxing appreciation accruing during the donors’ ownership exceeded Congress’s power under the Sixteenth Amendment.
- The taxpayers paid the assessed income taxes and sued for refunds in federal district court; the district court ruled for the taxpayers.
- The court of appeals reversed, and the Supreme Court granted review.

## Issues

1. Whether § 202(a)(2) of the Revenue Act of 1921 requires a donee’s gain on sale of gifted property to be computed using the donor’s basis rather than the property’s value at the time of the gift.
2. Whether, under the Sixteenth Amendment, Congress may tax the donee on the entire appreciation in value since the donor’s acquisition when the donee realizes that appreciation by selling the property.

## Decision

- The Supreme Court affirmed the judgment for the government.
- The Court held that § 202(a)(2) mandates carryover basis: the donee’s taxable gain equals the sale proceeds minus the donor’s cost (subject to applicable adjustments), not minus the value at the time of the gift.
- The Court held that taxing the donee on appreciation that accrued before the gift is constitutionally permissible when the appreciation is realized upon the donee’s sale.
- The refund claims were denied.

## Legal Principles

- For property acquired by gift within the statute’s scope, Congress may require the donee to use the donor’s basis to compute gain on a later sale.
- Under the Sixteenth Amendment, realized gain from the sale of property may be treated as the seller’s taxable income even if part of the appreciation occurred while a prior owner held the asset.
- A gift transfer does not require Congress to segment appreciation by periods of ownership for income tax purposes; Congress may tax the full realized increase in value when disposition occurs.
- A carryover-basis rule for gifts prevents appreciation from avoiding income taxation solely because the asset changes hands by gift rather than by sale.

## Conclusion

The Court sustained Congress’s carryover-basis rule for gifts and held that, when a donee sells gifted property, the Constitution permits taxing the donee on the full realized gain measured from the donor’s basis, including appreciation that accrued before the gift.


Taft v. Bowers, 278 U.S. 470 (1929)