Helvering v. Horst Facts: Horst owned some negotiable bonds. Negotiable bonds pay off in two ways.

First, once the due date of the bond comes, they can be cashed in for the principle amount of the bond. Second, they also come with some 'interest coupons' that can be cashed in at regular intervals for an interest payment. Horst earned a lot of money and realized that due to progressive tax rates, the last dollar a person earns in a year is taxed at a significantly higher tax rate than the first dollar they earn. So he came up with an idea to give all of his interest coupons to his son (who otherwise had an income of $0). That way the family could pay less in taxes overall because the son would get taxed on the income at a lower rate than Horst would. When Horst filed his taxes, he did not include the income from the interest coupons in his gross income. The IRS disagreed. Horst argued that since the son was the legal owner of the interest coupons, they should be included in his son's taxes. The IRS argued that Horst was the real owner of the interest coupons, and needed to pay taxes on them, regardless of his machinations. The Tax Court found for the IRS. Horst appealed. The Appellate Court reversed. The IRS appealed. Issue: Whether or not gifting interest coupons relieve the donor from paying taxes? Held: No. The US Supreme Court found that the power to dispose of income is the equivalent to ownership of that income. The Court found that Horst could not attribute the 'fruit' (aka the interest coupon) to his son while retaining the 'tree' (the negotiable bond itself). The Court noted that if Horst had given the entire bond to his son, then it would have been taxable to the son. Note that Horst could have gotten around this problem if he had done things differently. 26 U.S.C. 102 says that a gift is excludable as income. But 102(b) says that gifts of income derived from property are not excludable. Therefore the interest coupons (which represent income derived from the bond) are not excludable as gifts. But if Horst had instead given his son the bond instead of the interest coupons, then the bond would have been excludable as a gift to the son.