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Cowden v. Commissioner | 289 F.2d 20 (1961)

Under the cash equivalency doctrine, income resulting from certain noncash transactions may be treated as equivalent to cash for tax purposes, even though no cash was received. But what constitutes a cash equivalent? The Fifth Circuit dug up the answer to that question in Cowden versus Commissioner.

In 1951, Frank Cowden and his family leased their oil, gas, and mineral rights to Stanolind Oil and Gas Company. Stanolind agreed to pay a bonus fee of just over $500,000.

Although Stanolind was able and willing to pay the bonus in full in 1951, the Cowdens arranged to receive the sum in yearly installments. Stanolind agreed to pay about $10,000 immediately and $250,000 in 1952 and '53. Stanolind issued promissory notes for the delayed payments.

Shortly thereafter, the Cowdens assigned their right to the 1952 payment to the First National Bank of Midland. About a year later, the Cowdens also assigned their right to the nineteen fifty-three payment to the bank.

On their 1951 and '52 income tax returns, the Cowdens reported the income they received from the assignments as capital gains. However, the commissioner of internal revenue determined that the Cowdens should’ve reported the fair market value of the entire bonus as ordinary income in 1951 when Stanolind incurred the payment obligation.

The tax court agreed with the commissioner’s determination and treated all bonus payments as equivalent to cash. The tax court based its decision on the fact that Stanolind was able and willing to pay the entire amount in 1951 and only agreed to pay in installments because the Cowdens wanted to minimize their tax liability. The Cowdens appealed to the Fifth Circuit.

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