Bailey v. Commissioner

James Bailey (plaintiff) purchased a home in an area subject to an urban-renewal project. Bailey received a grant related to the project regarding the façade of his home. More specifically, Bailey signed an agreement in which he granted an easement to the city’s urban-renewal agency (URA), which allowed the URA to enter the property to repair the façade of the home and to repair it later at Bailey’s own expense if the house failed to meet the terms of the agreement. Moreover, Bailey did not control the work that was performed or the contractor who performed the work. In fact, Bailey did not actually know the amount of the grant at the time. Bailey subsequently learned that the URA had expended $19,256, $38,865, and $5,000 in the years 1978, 1979, and 1980 via the grant in regard to Bailey’s home. The Commissioner of Internal Revenue (defendant) took the position that these funds were gross income to Bailey but also admitted that if the funds were construed as income, Bailey could increase his basis in the home by that corresponding amount of income. Bailey argued that the grants were not income because the grants were undertaken for the general welfare, and Bailey did not have complete dominion over the funds. The government noted that regarding programs for the general welfare, those tax exemptions were generally regarding need-based welfare programs, whereas the façade renovation grant in no way considered Bailey’s need or lack of need of the funds. Existing caselaw held that gross income, in the meaning of the Internal Revenue Code, arose from all accessions to wealth over which the taxpayer held complete dominion.