A Primer on Disregarded Entities

Disregarded Entity Tax Reporting Ownership
Disregarded Entities

If you spend a substantial amount of time around tax professionals, there’s a decent chance you will encounter the phrase “disregarded entity” at one point or another. This phrase, fear-inspiring though it sounds, is a fairly straightforward concept which has relevance in a variety of contexts. In this article, we will introduce disregarded entities and explain why you and other HTW readers should be familiar with this concept.

Tax Reporting

Not all business entities are the same. As we have discussed in our webcast on the topic, businesspeople can select between a number of distinct corporate entities depending on which entity best suits their particular situation. Once an entity has been selected, one of the remaining steps is for the owner to determine whether that entity will be “disregarded” for tax reporting purposes. In simple terms, if an entity be disregarded, then it will not file its own separate tax return to the IRS; it is disregarded to whomever is the current owner, and so the current owner will include the financial data of the entity within his or her own return. Disregarded entities, therefore, can be thought of as assets which are fully traceable to the owner, rather than wholly distinct entities.

Only certain corporate entities may be disregarded. For instance, a single member LLC is typically disregarded to the single member unless the single owner specifically elects to treat the LLC as regarded. And so income generated by such an LLC would be included on the owner’s tax return rather than a tax return prepared and owned by the entity itself.

Certain corporate entities can never be disregarded. S Corps, C Corps, and multi-member LLCs in which the two members are not husband and wife in a community property state cannot ever be disregarded and must report income independently.

1031 Exchange Context

Another context in which disregarded entities may show up as an important concept is the 1031 exchange industry. The tax code requires that whichever entity owns the relinquished property in a 1031 exchange must also acquire title to the replacement property. As I’m sure our readers are aware, title to real estate can be held by corporate entities, and so if a regarded corporate entity hold title to real property then this preexisting ownership must kept consistent throughout the exchange. If the entity doesn’t remain consistent then a valid tax-deferred exchange cannot occur.

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Cuts to Benefit Programs Indispensable to Trump’s New Budget Plan

Trump Budget Tax Plan Cuts Spending Benefit
Trump’s Budget Plan

As we discussed in our feature article on Trump’s tax reform proposal, President Trump’s plan is to consolidate the existing tax bracket structure by reducing the number of brackets from seven down to three. This consolidation will positively impact very high earning Americans and negatively impact many middle earning Americans; those at the top will receive a cut, while many in the middle will be faced with a somewhat higher tax burden than they would have previously under the seven bracket structure.

As it turns out, the tax reform proposal is just one part of a larger plan to alter the entire existing financial landscape of our country. Trump’s aim is to tackle our massive national debt and restore our overall financial health; toward this end, he has developed a comprehensive budget plan which has proved highly controversial and is currently facing significant difficulties in the Congress. The question remains whether the budget plan can successfully pass through without being transformed into something unrecognizable in comparison to its original form.

Let’s look at some of the major provisions of the plan and then go over some of the controversy surrounding it.

Major Cuts to Benefit Program Spending

Certainly the most controversial aspect of Trump’s budget proposal is its management of funds dedicated to benefit programs. The new plan aims to slash approximately $200 billion of benefit program spending from the federal budget immediately; the plan also aims to slash funding for Medicare, Medicaid and the Obama health law. Overall, Trump’s plan will cut approximately $5.4 billion from the budget over the course of the coming decade. By 2027, the goal is to turn our current national annual deficit into a small surplus.

Cuts Provoke Philosophical Debate

Unsurprisingly, Trump’s budget plan has provoked strong opposition from Democrats. Progressive legislators haven’t been shy to claim that the budget plan’s large cuts are politically unworkable as well as socially undesirable given the effects they will have on broad segments of the population. Aside from political objections, the budget plan has also raised deeper philosophical issues among politicians both in Washington, D.C. and throughout the entire country. The plan brings up complex questions about the proper role of government in civic life: what responsibility does the federal government have to effectively “gift” resources to citizens? And, assuming the federal government does have such a responsibility, how much is each citizen entitled to receive?

We will have to watch and see whether Trump’s plan will be enacted without significant modifications. What is perhaps most fascinating, however, is the way that Trump’s budget is calling upon pundits and political leaders to reevaluate some of the most foundational questions of our political life. It’s probably safe to say that the Trump administration will leave a very lasting imprint on our civic life as it will compel us to look in the mirror and carefully examine the features which make us who we are.

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A Few Thoughts on Seattle’s New Tax on the Wealthy

Seattle City Income Tax Wealthy Residents
Seattle’s New Tax on Wealthy Residents

On Monday, July 10, the Seattle City Council unanimously approved a new city income tax targeted toward Seattle’s highest-earning residents. The new tax will collect 2.25 percent on incomes above $250,000 for individuals and $500,000 for married couples filing jointly. Expectedly, the measure has received a great amount of both positive and negative feedback.

As our regular readers will know, here at HTW it is almost unheard of for us to take a strong stance on any controversial issue. By design, our material is intended to provide readers with helpful information so that they can more capably navigate the complex worlds of tax and accounting. In other words, our aim is to confer tangible benefits, not push political agendas. Consistent with this aim, we’d like to look carefully at this new city tax and provide a balanced opinion of its usefulness and likelihood of success. Whether it be upheld or struck down, our one unswerving hope is that this new tax creates a more just environment for Seattle residents of all socioeconomic backgrounds.

Intense Reactions

As mentioned, the tax has sparked intense responses on both sides of the debate. Supporters point to a number of facts which seem to bolster the tax’s desirability. Seattle imposes one of the heaviest tax burdens on low-income families in the nation; on the other end of the spectrum, high earners in Seattle enjoy one of the lightest local tax burdens. Supporters also insist that the additional funds generated by the tax are necessary to improve local conditions.

Opponents of the tax, on the other hand, have put forth several arguments against the tax. For one, they contend that this new city income tax could be a slippery slope, and if left unchecked it could lead to a statewide income tax which would affect Seattle residents of all income levels. Adversaries also argue that the city’s targeting of wealthy residents is unfairly discriminatory and is tantamount to punishing success.

It seems likely – practically certain – that the divide will persist well into the distant future. What’s also nearly certain is that opponents of the new city income tax will file a legal challenge against the measure.

Legal Objections

Opponents claim that the new tax may be undermined on several different grounds. For one, the state constitution of Washington provides that taxes must be uniform within a “class of property” to be upheld. This new income tax possibly violates this rule by selectively targeting wealthy residents. Furthermore, an active 1984 state law forbids cities from taxing net income; Washington also has a requirement that cities must receive approval from the state capital before they can impose new taxes.

At present, no one of these objections appears the most likely to be invoked. But there’s practically no room for doubt that at least one of these objections will be raised against the new tax in the near future.

Closing Thoughts

Certainly, not one of those who count themselves among Seattle’s wealthiest residents can argue against the desirability of improving local conditions and raising the living standards of Seattle’s entire population; the need to improve our city, as well as the need to address local poverty, is something all Seattle residents can agree upon. But whether this new city income tax be the proper method to address city financial issues is something which remains to be seen. On the one hand, there is no getting away from the fact that Seattle’s tax treatment of wealthy residents is comparatively very gentle; but how can proponents of the new tax be certain that changing this state of affairs won’t cause a mass of socioeconomic flight to other areas of the country? What if imposing the tax inadvertently leads to a financial situation for Seattle which is worse than it was before? Only time will provide the clarification we need.

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Gregory v. Helvering & the Old Roots of Modern Financial Duplicity

Stock Shares Financial Accounting Tax Income Dividend
Creative Finance

I know we promised that the last article would be the final installment of Huddleston Tax Weekly before the return of our XVI Amendment series. Surprisingly, we fibbed a bit. We’d like to sneak in just one more – and now we really promise, just one more – article prior to our return to that series. If this frustrates you, that’s understandable, but hopefully whatever frustration comes to the surface will immediately dissolve after you know what topic to which this article will be devoted: the important case of Gregory v. Helvering (1935). Though not the most well-known financial case, this Great Depression-era piece of litigation is fascinating for a number of reasons. Perhaps the most notable reason for its appeal is its relevance to more modern financial scandals.

In 2017, we have become accustomed to seeing all sorts of financial scandals. Some of these scandals, like the Enron scandal, can be very elaborate and involve complex accounting fraud, insider trading and other kinds of high-brainpower underhandedness. Every trend, no matter its size or significance, can be traced to a single source, and the case of Gregory v. Helvering stands as a legitimate candidate for the forerunner to much of the financial trickery present in recent decades. And this is not necessarily because the taxpayer in Gregory v. Helvering aimed to abuse the law in a nefarious way; the facts of the case, as they’ve come down to us, do not allow for such a conclusion. But in this case we do see an attempt to transact in such a manner that the form of the law is obeyed but its spirit is ignored. And this creative maneuvering is something that we see again and again in the modern era.

Let’s look at the details of this case to get a better sense of why it foreshadows many recent financial scandals.

Facts

The taxpayer owned a company – United Mortgage Corporation – and this company held 1000 shares of another company’s stock (Monitor Securities Corporation). The taxpayer wished to sell this stock but also wished to minimize (or ideally eliminate) the potential tax liability of such a sale. Toward this end, the taxpayer established a new company, Averill Corporation, and then transferred the 1000 shares of Monitor to Averill. The taxpayer then transferred the 1000 shares of Monitor to herself, and then quickly dissolved Averill. The Averill entity clearly had no other function aside from acting as a conduit through which to distribute the shares to the taxpayer. The taxpayer contended that the series of actions which occurred fell under section 112 of the Revenue Act of 1928 as a corporate “reorganization.” If what occurred were in fact reorganization under section 112, the gain realized by the taxpayer would not be taxable.

Law

The relevant subsections of 112 were (g) and (i). Subsection (g) stated that distributions of stock on reorganization to a shareholder in a corporation which was a party to the reorganization will not result in gain (to the receiving shareholder). Subsection (i) lays out a definition of reorganization.

Ruling

The court (Supreme Court of the U.S.) ruled that a legitimate reorganization had not occurred and that the deficiency assessed by the IRS was correct. Even though the taxpayer had apparently satisfied every element of section 112, the court reasoned that section 112 did not apply because the Averill Corporation was clearly a “dummy company” in the sense that it served no other purpose than to eliminate the tax liability which would have normally followed the stock distribution. Hence, though the taxpayer took steps to fall under section 112, what had actually occurred was a dividend, because there was no substance underlying the creation of the Averill Corporation.

What we have here, therefore, is a fascinating early example of creative business maneuvering. The taxpayer either received expert counsel on section 112, or was familiar with section 112 by way of independent research, and the taxpayer established the dummy company for the specific purpose of falling within the meaning of this statute. And even though the steps taken by the taxpayer would seemingly bring the transaction under section 112, the court was not willing to let this type of trickery slide under the judicial radar. In some ways, Gregory v. Helvering represents the embryonic form of more heinous modern trickery, such as the kind perpetrated by Enron’s CFO, Andrew Fastow.

Although what happened here is dwarfed by comparison to modern scenarios, it’s still interesting to see the roots of what goes on around us today.

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Readers who enjoyed this piece should consider viewing our presentation on business formation. This presentation was given by our principal and founder, John Huddleston

Kornfeld v. Commissioner and the Step Transaction Doctrine

Step Transaction Doctrine Legal Theory Tax Deduction
The Step Transaction Doctrine

We will look at one more case before returning to our article series on the sixteenth amendment. This is a case every HTW reader should become very well acquainted with: Kornfeld v. Commissioner (1998). Though it’s primarily an income tax case, it contains a plethora of other important topics and subtopics, and it presents a message which every HTW reader should commit to memory.

In the past, we’ve learned that whether a transaction be taxable is dependent on its substance, and that courts apply the “substance over form” doctrine to determine the true nature of a business transaction. The substance over form doctrine is not the only tool utilized by courts to review a transaction, however; the so-called “step transaction doctrine” is another tool commonly used by courts to clarify the nature of a transaction for tax purposes. Under the step transaction doctrine, multiple “steps” may be classed together and regarded as a single transaction; in this way, steps which may have been taken simply for the specific goal of altering tax liability can be overturned. The step transaction doctrine does not exist to create tax liabilities where none should exist, but to assess tax liability properly by viewing a transaction with the greatest level of accuracy.

In other words, the step transaction doctrine imposes a sort of coherence to a multistep transaction so that it can be properly adjudicated. This is very common in law: legal theories often condense or codify reality so that it can be interpreted using preexisting categories. But the rationale for theories such as the step transaction doctrine is not only about simplicity; there is also the aim of viewing a matter according to its true nature. Even though the step transaction doctrine may “condense” things for the sake of simplicity, many contend that this theory (and other similar theories) portrays matters in a more accurate way, that it provides a clearer sense of what actually occurred. Let’s look at the details of the Kornfeld case to get a better sense of this doctrine and its rationale.

Facts

The facts of this case are a bit complicated. Kornfeld, a highly experienced tax attorney, established a revocable trust which he intended to use to purchase bonds. He entered into an agreement with his daughters in order to claim an amortization deduction on the bonds; the agreement was that Kornfeld would transfer funds (from the trust) to the bond issuing institution equal to the value of a life estate in the bonds and then the daughters would pay the balance on the bonds. The agreement also held that Kornfeld would deliver checks to the daughters for the exact amount which they paid to cover the balance.

Kornfeld and his daughters executed this initial agreement and Kornfeld obtained the bonds. Subsequently, the tax code was changed so that the amortization deduction sought by Kornfeld was made unavailable in situations involving related parties. In response, Kornfeld and his daughters made another agreement which included Kornfeld’s secretary; the second agreement held that the daughters would take a second life estate interest in the bonds following Kornfeld’s death, and that the secretary would have the final remainder interest upon the death of the daughters. Importantly, Kornfeld used IRS valuation tables to create his estimates for the value of his life estate interest. Kornfeld claimed amortization deductions on the bonds and then the IRS assessed a deficiency after they declared that the transaction had failed to produce a genuine life estate in the bonds.

Law

Under U.S. code – specifically section 167 – taxpayers may claim a depreciation deduction of a reasonable amount based on wear and tear for property held primarily for the production of income (such as a bond). IRC subsection 167(d) pertains to life tenants and beneficiaries of trusts. Under these rules, life estate interests in bonds – or “term interests” or limited interests – are considered amortizable (or depreciable) and thus taxpayers may claim a deduction for such an interest. Also see 26 CFR 1.167(a)-1.

Ruling

Applying the step transaction doctrine, the court rejected the argument made by Kornfeld that the payments made to his daughters (and secretary) had no real connection to the bond transaction, and that a genuine life estate interest had been created for tax purposes. The court based its decision on the fact that the seemingly disparate actions of the case were patently interdependent and all served to produce a single, underlying purpose. Kornfeld thought that he had devised a near foolproof scheme to completely avoid any tax liability on the bond transaction, but the court realized that a genuine limited interest had not been created and that Kornfeld had acquired total ownership of the bonds.

The Kornfeld case is a prime example of the step transaction doctrine at work. All HTW readers need to be aware of how the step transaction can affect their tax liabilities; if you aim to acquire a particular kind of tax treatment, you need to understand that your actions preceding any given transaction, as well as your actions which occur after a given transaction, can impact the tax treatment you ultimately receive. In the future – after a few more installments on the sixteenth amendment – we will look at a few more examples of how the step transaction doctrine has been used to alter the tax classification of a series of events.

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The Will of the People

Will People Tax Sixteenth Amendment
Will of the People

The phrase “the will of the people” has greater importance for Americans than it has for citizens of other states around the world. In large part, this stems from our deeply entrenched view of our system of government as a system which has developed entirely from the collective will of a free populace. The American public firmly believes that its governmental institutions are a direct extension of its collective will, a sort of living representation of its political voice. And to a good extent this view is accurate: our system has been informed by non-elite citizens to a considerably greater degree when compared with foreign systems across the globe. Though the history of these United States is much less egalitarian than most people care to appreciate, it is correct to say that the American project is more of a “popular” phenomenon than has been the case throughout most of history.

What most Americans do not realize, however, is that the will of the people can move society in any conceivable direction. Common perception tends to see the people’s collective will as an inherently benign force ceaselessly pushing our country in a way which maximizes our freedom and dispels injustice. But, as is often the case, common perception does not faithfully reflect reality. The will of the people is neither benign nor nefarious; it simply expresses whatever whims the people may have at a given moment. And if the people’s whims happen to push us toward less freedom or less justice – however that is defined – then that is precisely the direction we will be pushed in. Our constitution does not guarantee a certain quantum of freedom; as we learned in our prior installment, it provides that our lives may be encroached upon in any number of ways so long as the people’s will is expressed in the form of amendment.

This fact may come as a shock to many Americans. Our optimism tends to impart benevolent motives onto the public’s collective will in nearly every situation. What we have to understand, however, is that it makes little sense to ascribe any particular value to our collective will because our will can be shaped by just about any force imaginable – expediency, necessity, desire, passion. The sixteenth amendment did not simply address the practical difficulties associated with the apportionment requirement, it also expressed a public desire to ameliorate the widespread economic inequality which was present at the time of its passage. And it also enlarged the sovereignty of the federal government in relation to the states. It would be inaccurate to say that the results which followed the amendment were inherently just or proper; what is true is that these results were congruent with the collective sentiment of that era.

As we explore the sixteenth amendment in greater and greater detail, it is important for us to keep in mind that this amendment only represents the ability of our constitution to express the desires of the public, it is not an example of benevolent societal change.

In our next installment, we will discuss the case of Hylton v. United States (1796) and look at the impact that the ruling of this case had on the development of the sixteenth amendment.

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Mannillo v. Gorski: The Case of the Intrusive Neighbor

Property Law Adverse Possession
Property Law

Most aspiring homeowners understand that owning property involves a great deal of responsibility. When you own property, all of the maintenance and liabilities which would otherwise be taken care of by a landlord are absorbed by you. A leaky faucet, faulty drain or unstable foundation is no longer someone else’s obligation. Usually, the responsibilities of homeownership are fairly mundane and do not place an extreme level of stress on homeowners. Every now and then, however, homeownership presents a unique problem which demands an inordinate amount of attention and energy in order to fix. The case of Mannillo v. Gorski (1969) is one example of such a problem.

Facts

Gorski (the defendant and appellant) acquired possession of a piece of land in 1946. Mannillo (the plaintiff and respondent) possessed a piece of land which was adjacent to Gorski’s land. Gorski’s son made various improvements to Gorski’s property in the summer of 1946. One of these improvements encroached upon Mannillo’s property. The encroachment was quite small and was not easily visible to the casual observer. By the time Mannillo decided to bring a suit against Gorski in order to remove the encroachment, the statutory period of time required for adverse possession had been satisfied. Gorski argued that he had lawfully gained title to the disputed land because his encroachment satisfied both the element of time as well as the other statutory requirements of adverse possession.

The question before the court was: did Gorski gain title to the disputed section of land by way of adverse possession according to the state (in this case, the state of New Jersey) statute?

Law

In order to gain title by way of adverse possession, the possession must be exclusive, continuous, uninterrupted, visible and notorious, and it must satisfy the statutorily defined period of time.

Importantly, the court in Mannillo v. Gorski determined that there need not be an element of knowing intentional hostility on the part of the adverse possessor. Though an earlier court opinion held that such a mental state was required, the court in Mannillo v. Gorski concluded that such a state was unnecessary.

Ruling

The court (the Supreme Court of New Jersey) remanded the case and ordered a new trial. Mannillo had succeeded at the trial court level because the trial court included intentional hostility as part of the requirements for adverse possession. And Gorski had actually been under the impression that the disputed section of land was within his territorial boundary, and so clearly the encroachment could not be said to be knowingly hostile. The Supreme Court threw this requirement out.

However, the court found that Gorski’s encroachment did not necessarily satisfy the requirements of adverse possession because the encroachment was so minor as to be practically unnoticeable without focused scrutiny. In cases involving a minor encroachment across adjacent properties, the true owner must have actual knowledge of the encroachment in order for the requirements of adverse possession to be met. The court ordered the new trial to utilize this updated standard.

Clearly, the facts of Mannillo v. Gorski are not likely to be replicated very often; but Mannillo v. Gorski is still something homeowners should be aware of because it illustrates the sort of bizarre difficulties which can occasionally arise during the course of homeownership. Again, if you own property, you probably will not experience what Mr. Mannillo experienced, but it is still important to be aware of even the most unlikely possibilities.

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If you’re a homeowner and you’d like to learn more about the tax benefits which arise through property ownership, view the following webcast presentation by our resident CPA Jessica Chisholm

The Tariff Which Shook History

Tariff Rate Act Morrill Tax
Morrill Tariff

As has been noted previously, substantive changes in tax policy are often closely tied to big changes in the social order. And the tie is not unidirectional, resulting solely from a tendency for tax measures to provoke heated reaction from a population. Sometimes a social change – such as a war – can massively alter the tax policy of a state. In the historical process, tax policy is both an active agent and a reactive agent, both a cause and an effect.

In most cases, it is not too difficult to determine the impact which a change in tax policy has had on society. The assessment of most changes is rather straightforward. The Morrill Tariff of 1861 – named after its sponsor, Vermont politician Justin S. Morrill – stands out among tax law because it defies this trend: although there can be no argument against its general importance, there is considerable controversy as to its specific role in history. Historians are divided as to what role the tariff act played in furthering the secessionist sentiment among Southern states: was the tariff a point of only minor irritation for Southern states? Or was it a matter of major frustration which caused Southern states to view secession as a necessary solution rather than a possibility?

The thing which is certain about the Morrill Tariff is that it raised rates substantially. In the years just preceding the Morrill act, American tariff rates had been unusually low by global standards. Between 1857 and 1860, the U.S. had average rates of approximately 17 percent overall and 21 percent on dutiable items. By 1865, the Morrill Tariff had increased these rates to 38 percent and 48 percent, respectively. Aside from bringing U.S. rates closer to global averages, the Morrill act also provided means to ameliorate the financial woes plaguing the U.S. Treasury.

Support for the Morrill act tended to vary according to political and sectional affiliation. The vast majority of Republicans voted in favor of the act and the clear majority of Democrats opposed it; there was an unmistakable sectional division as well, with every lawmaker from the Southern states except one voting against the act.

Historians who believe that the Morrill Tariff played only a minor role in furthering sectional hostility emphasize the element of time in the adoption of the act. The development of the tariff had begun well before any state had seceded from the union, but not until several states had withdrawn was the tariff act able to succeed in Congress. Historians point to this fact and infer that the tariff had only minimal significance given that a number of states had already decided to secede.

However, on the other side of the issue, historians emphasize that tariff revision had been a heated topic of discussion well before any state declared secession. The South had a clear interest in embracing free trade given the nature of its economy; Southerners also generally felt that they lacked the proper representation in the federal government which was necessary to ensure an equitable outcome. What’s more, the Morrill Tariff was mentioned specifically as a source of displeasure by the conventions of both Georgia and South Carolina; the tariff was even discussed in South Carolina’s secession ordinance.

The precise role of the tariff in promoting secession (and ultimately the War Between the States) will likely be debated for many years to come. Both sides of the matter have facts on which to rest their case; about which there can be no debate, however, is the fact that the tariff must be regarded among the most consequential in U.S. history.

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Armory v. Delamirie & the Evolution of Property Rights

Property Possession Right Law Priority
The Property Right of Possession

The evolution of our law is truly an amazing phenomenon. It is equal parts humbling and awe-inspiring to contemplate that many foundational legal concepts trace their origin to cases which occurred hundreds of years ago. To the casual observer, it may seem as though our law emerged just recently all at once as a finished product, the miraculous outcome of one act of divine intervention; in actuality, our system has come about through an exceedingly slow, gradual process of revision and refinement transpiring over the course of many centuries.

Take, for example, the very basic idea that a person who finds an object establishes some type of claim of ownership to the object. Colloquially, this principle is referred to as the rule of “finders, keepers.” This simple notion was not created by an American jurist, nor was it created within living memory. In point of fact, this idea first acquired legal significance through the famous English case of Armory v. Delamirie which was heard in 1722. Armory formally established the principle that a finder acquires a form of legal title by way of possession.

Facts

Armory (plaintiff) was the helper of a chimney sweep. While on the job, he found a jewel composed of gems embedded in a ring. Armory took the jewel to a goldsmith (Delamirie, the defendant) to have it appraised. The goldsmith’s apprentice took the gems from the ring so as to weigh them separately. The apprentice gave Armory an estimation of their value and then returned the ring without the gems. The apprentice made an offer for the jewel but Armory declined. Armory demanded that the gems be returned inside the sockets of the ring in the same condition as when they were initially brought to the goldsmith’s shop. The apprentice did not comply – presumably on the excuse that he “lost” the gems – and subsequently Armory brought a suit against the goldsmith (via respondeat superior) for the return of the jewel.

The issue before the court was whether Armory had a superior title to the jewel despite the fact that he was not the true owner. That is, whether the title he acquired through finding the jewel was sufficient to warrant the return of the jewel from the goldsmith.

Law

In the hierarchy of ownership, the present possessor (or finder) has a superior title against everyone except the true owner.

Ruling

The court (The Court of King’s Bench) ruled in favor of Armory. Since he found the jewel, Armory’s title was superior to all but the true owner; and since the true owner was unknown this effectively gave Armory true ownership. The court ordered Delamirie to pay Armory for the jewel at the highest possible estimation of the jewel’s value in the absence of any contradictory evidence as to the jewel’s value.

The importance of possession in acquiring property rights was understood prior to the case of Armory v. Delamirie; in fact, the rule of “finders, keepers” has existed in some form since ancient Rome. But it was Armory which caused this old idea to be codified in our common law. The fact that our common law was heavily impacted by a chimney sweep helper’s stroke of good fortune is nothing less than remarkable.

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Readers who enjoyed this piece should view our presentation on the tax savings available to real estate owners given by our CPA Jessica Chisholm

Thought of the Day: What’s in a Tax?

What’s in a tax?

Divested of all misleading associations and stripped of any false labels, what does a tax truly represent?

Tax History Policy Interest Taxation
Tax Policy

In these last several months, Huddleston Tax Weekly has covered a wide range of topics. We’ve looked at tax measures from eras far removed from our own: we’ve examined the Tea Act which fueled our revolutionary fervor; we looked at the tax acts passed by the Confederacy in its struggle against the North; we even covered the geld, a medieval tax which provides a glimpse into the formation of the English nation. We’ve also touched on topical issues, such as Apple’s EU tax bill and the tax instituted in Vancouver designed to stabilize the real estate market. Our treatment of these many issues has vastly increased our understanding of the role of taxes in history and in our current society.

If there were a single lesson to be drawn from all of the many issues we have covered in these recent months, the lesson would be: tax policy is shaped by the competing interests of distinct groups. Taxes are not developed through a completely rational process in which the interests of every relevant group are considered carefully; in a very real sense, taxes are developed through a competitive process, and the end result usually involves certain groups having a more favored position than others. This is not the most pleasant revelation, but it is one which accurately reflects reality. It may do more to serve the ego of our society to suppose that tax policy is strictly the outcome of reasoned, sensible debate among lawmakers, but this does not mean that such a supposition is any reflection of the truth.

Of course, there are undoubtedly plenty of other lessons to be drawn from the issues we have discussed, and in future installments of Huddleston Tax Weekly we will do our best to cover these lessons. But for now, it is important to understand what taxes represent at a very basic level. Behind all the number crunching, the box checking, the empty bureaucracy, the abstruse terminology and the lofty rhetoric, a tax is a tool utilized to further the interests of a particular group. A tax can be created for any number of reasons: a tax may be used to generate funds for war; a tax may be implemented in order to stabilize a specific market; or a tax may be forcibly imposed by an occupying entity, as was the case with the geld. But no matter what the reason is for its creation, it is clear that any given tax is an extension of a specific interest group.

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