Tax Legal Services · Primary-source case analysis

Taft v. Bowers: A Donee Could Be Taxed on Pre-Gift Appreciation

By Aneeta Mishra and Timothy Chan

Published August 30, 2026 · Updated October 20, 2026

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

A gift of appreciated stock did not reset its income-tax basis to the stock’s value on the gift date. In Taft v. Bowers, 278 U.S. 470 (1929), the Supreme Court upheld Congress’s power to tax the recipient on the full gain realized on a later sale, including appreciation while the donor owned the shares. The majority’s explanation was that there had been one original investment of capital, followed by a sale that separated its appreciation—not a new investment by the recipient at the gift-date value.

The statute prescribed carryover basis

Elizabeth Taft received Nash Motors shares from her father during 1921 and 1922 and sold them in 1923. The shares had risen in value before the gifts and rose further before her sale. She paid tax measured from her father’s cost, then sued to recover the portion attributable to his ownership period. She accepted taxation of the increase during her own ownership. The district court ruled for the taxpayer; the Second Circuit reversed. The Supreme Court decided the consolidated Taft and Greenway cases on February 18, 1929. Taft, 278 U.S. at 478–79.

Section 202(a)(2) of the Revenue Act of 1921 expressly carried over the donor’s basis for property acquired by gift after December 31, 1920. Another provision excluded the value of a gift from gross income but included income from that property. The statutory command was clear to the Court; the serious dispute was whether Congress had constitutional power to impose that tax. Taft, 278 U.S. at 479–81.

The Court illustrated the dispute with an abstract example: A donor paid $1,000, gave the shares away when worth $2,000, and the recipient sold them for $5,000. Using donor cost produces $4,000 of gain; using gift-date value produces $3,000. These were the opinion’s explanatory figures, not a statement of Taft’s actual transaction amounts. The contested $1,000 represents appreciation before the gift, not tax on the entire $5,000 proceeds. Taft, 278 U.S. at 479.

The gift did not erase the built-in gain

Taft argued that the property became her capital at its value when received. On that view, treating any part of that value as her income improperly taxed someone else’s appreciation. The majority accepted that Congress could not simply label anything income; it nevertheless rejected the proposed reset. If her father had sold the stock, the increase over his investment would have been taxable income. Giving it away did not turn that same increase into a new capital investment made by the recipient. Taft, 278 U.S. at 481–82.

This explains why the history before the gift mattered. The donor’s cost measured the capital put into the asset. The gift transferred the property and its accumulated appreciation; it did not create another purchase at the current market price. Permitting successive gifts to erase the gain would frustrate Congress’s scheme for taxing gains from capital investments. Taft, 278 U.S. at 482–83.

Congress could tax the full realized appreciation

The majority tied the tax to the recipient’s actual sale. At that point she received both the original invested amount and the entire appreciation. The sale separated the gain from the stock and made it available to her. Congress could require her to assume the donor’s position for measuring that gain without acting unreasonably or arbitrarily. The Court rejected the theory that appreciation could qualify as the recipient’s income only to the extent it arose during her ownership. Taft, 278 U.S. at 482–84.

The Supreme Court affirmed the Second Circuit judgments, leaving the challenged tax in place. Its decision resolved the constitutional objection to measuring the donee’s sale gain from donor basis. Taft, 278 U.S. at 484.

Sale was the operative realization event

The practical distinction is between receiving property and later realizing gain from it. The receipt can be a gift while the recipient’s later sale still produces income measured using the donor’s investment. A gift-date appraisal alone cannot supply that historical basis. Obtain acquisition records and subsequent basis adjustments as well as the gift and sale documents.

Today, 26 U.S.C. § 1015 supplies the statutory gift-basis rules. Subsection (a) starts with the donor’s basis, taking account of applicable adjustments, but uses gift-date fair market value for determining a loss when that value is lower than the donor’s adjusted basis. Subsection (d) provides rules for certain gift-tax basis increases; for gifts after 1976, the increase is limited to gift tax attributable to net appreciation rather than automatically including all gift tax paid. Subsection (e) sends covered spousal transfers to section 1041 instead. Those provisions explain why donor basis, gift-date value, gift tax and transfer type should be kept separately. The 1929 constitutional holding does not calculate every modern transfer’s basis for you.

For a foreign gift, Form 3520 reporting asks a different question from gain on a later sale. Our tax-services page describes the firm’s representation. Bring the donor’s purchase and adjustment records, the gift instrument, valuation support and the recipient’s disposition documents so the basis can be reconstructed rather than assumed.

Key takeaways

• Preserve the donor’s acquisition cost and basis adjustments; gift-date value is not a substitute for those records.
• Identify the later sale that realizes the appreciation and separate sale proceeds from gain.
• Keep gift-date value and gift-tax records for the distinct current statutory rules that may use them.
• Identify whether the transfer was a lifetime gift, a covered spousal transfer or another kind of acquisition before selecting the basis rule.