Case Analysis Essay on Cowden vs Commissioner

Introduction

In Cowden vs. Commissioner, the case was done between the year of 1951 and 1952 was a case between Cowden and the commissioner which was focused in outlining the factors that are used to determine on whether something received can be determined to be an equivalent in cash. This is used to view whether something received regarding cash is taxable. In the above case, the court used two doctrines to determine whether cash received is taxable and on what terms should it be taxed and the focus is on income. The main doctrines used by the court in determining these case is the constructive receipt and cash equivalence. Constructive receipt is used to determine when cash based taxpayer is in a position to receive gross income. From that, the taxpayer is subject to be taxed if the current year, if they have no control as to when the incomes received, should be taxed. Cash equivalence, on the other hand, is when the cash received by a liable taxpayer is taxed directly upon the issue of being received. It is upon the responsibility of any company to pay federal tax however not all follow up on the provisions laid out to make sure companies follow however not all companies do this in the event of trying to minimize the tax liability. The following paper is going to analyze such a case where one of the company failed to pay the federal income tax.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

From the case, the taxpayer had entered into a deal of oil and gas royalty payments with bonuses of two years consequently. The taxpayers later signed contracts that made the deal to look like long-term capital gains upon which the commissioner argued that the money received should be taxed. Based on the investigations of the commissioner, he found that the bonus of payment made should be taxed based on the following findings. The bonus payments were made when they were at their fair market value and added a four percent discount. When the court decided to tax the bonus payments at their full value in the year that the agreement was made and the depletion should not be included since it would reduce the amount of taxation applied on the bonus (Frey, & Feld, 2018). In expense of being promises to be paid for future investments the payments were made at a later day but with the current market prices.

Negotiable instruments are documents that guarantee payment of specific amounts with the payer's name being indicated on the paper. This is a form of contract that indicates that a person is going to pay the amount of money they have pledged to pay. In this case, there were no negotiation instruments presented which in our case would have been presented as a cash equivalent. In this case, Cowden made an oil and gas lease for themselves. On these leases, they agreed to make bonus payments which they claimed to be advance royalty. This type of decision of making the decision is made when individuals want to pay fewer taxes in the future that is why these bonuses were made at the beginning of the lease. The payment was made regardless of the production of a lease being commenced (Graetz, et al., 2005).

The case was ruled based on the following evidence. The family leased an oil and gas mineral rights to Stanolind Oil and Gas Company a company that deals with oil and gas. Stanolind Company agreed to pay a bonus of $511192.50, stanolind was in a position to pay the bonus in full however the Cowden's had other plans of getting the payment in installments(Klein, Bankman & Shaviro, 2003). This was not the case for Stanolind made promissory notes in payments that they were not able to pay. In the next year, the Cowden's assigned a bank that was going to receive nominal discounts from the payments made. The income received from these payments was termed as long-term capital gains which were going to be used against them by the commissioner. To minimize the tax liability the Cowden's decided to be paid in installments. The commissioner decided that the actual bonus should have considered as income which should have been taxed at the very first installment as a whole. Hence they decided to calculate the fair value of the bonus including the fair market value fee. Despite being paid in installments, the commissioner based the bonus to be an income for the Stanloind Company was willing to pay the whole market value of the bonus at the beginning of the year.

Federal income tax is any tax levied on the annual earnings of an individual, companies, and entities. These earnings include any form of earning that qualifies to be termed as an income. From the case Cowden vs. commissioner, when given the lease and asked to be given the bonus even before the lease started working, the bonus paid should have been termed as income that is taxable under the federal taxable income(Mertens, 2014). From the case, it can be noted that when the market value of the bonus was calculated the amount of tax liability that had befallen the Cowden company was lower compared to what could have been paid when the bonus was paid in full at the beginning of the year.

The main focus was to distinguish what an income was and what was not to be termed as income. From the business understanding of what is income, income is any cash flow that is generated and separate from the capital. Income is any amount generated by investment and is not part of the capital. From the lease made between Cowden and Stanloind the bonus was paid in advance which was supposed to be paid when the lease bore fruit. Thus the reason as to why it was calculated back into fair market value so that the initial value of the federal tax should be counted (Surrey, et al., , 1955). It is on that view that Cowden is liable to pay the government federal income tax on the bonus received in advance from Stanloind Company, a move that should be considered to be a defrauding thing in the court of law. Any act made by a company in the move of making or reducing the amount of tax to be paid should be considered to be unlawful and punishable under the court of law with a penalty or a fine.

In the Cowden VS Commissioner case, the evidence placed was the payment made to Cowden in the form of bonus for the benefit of the lease. In this, Cowden should have made an entry of the bonus as income which was to be used to pay the federal income tax. The outcome of the case was for the Cowden Company to pay up the federal income tax using the initial market value of the bonus issued.

Conclusion

In conclusion, there are various cases of companies that do not list their incomes with an aim of not paying the federal income tax. The tax is one of the ways used to fund government functionalities (Towery, 2017). Companies should be at the forefront of being ethical in the functioning of the work of fulfilling the principalities of the government. There are many accounting obligations that companies often neglect in the hope of not getting caught and paying less in the form of taxes.

References

Surrey, S. S., Warren, W. C., McDaniel, P. R., & Ault, H. J. (1955). Federal Income Taxation: Cases and Materials (p. 1066). Foundation Press.

Mertens, J. (2014) Law of Federal Income Taxation.

Graetz, M., Schenk, D., Freeland, J., Lathrop, D., Lind, S., Stephens, R., ... & Keyes, K. (2005). Federal Income Taxation, Principles and Policies (University Casebook Series). Foundation Press/West Academic.

Klein, W. A., Bankman, J., & Shaviro, D. N. (2003). Federal income taxation (pp. 184-86). Aspen Publishers.

Klein, W. A., Bankman, J., & Shaviro, D. N. (2003). Federal income taxation (pp. 184-86). Aspen Publishers.

Frey, B. S., & Feld, L. P. (2018). Illegal, immoral, fattening or what?: How deterrence and responsive regulation shape tax morale. In Size, causes and consequences of the underground economy (pp. 27-50). Routledge.

Towery, E. M. (2017). Unintended consequences of linking tax return disclosures to financial reporting for income taxes: Evidence from Schedule UTP. The Accounting Review, 92(5), 201-226.