International Freighting Corp. v. Commissioner, 135 F.2d 310 (2d Cir. 1943)
International Freighting Corp. v.
Does a corporation realize and recognize taxable gain when it satisfies an employee compensation obligation by transferring appreciated property rather than cash, and is the amount of the employee's compensation and the employer's deduction measured by the property's fair market value at the time of transfer?
When a taxpayer satisfies a legal obligation by transferring property, the transfer is a realization event. The transferor is treated as having sold the property for its fair market value, recognizing gain or loss equal to the difference between fair market value and adjusted basis under the general realization rule (now codified in I.R.C. § 1001). Where the obligation is to pay compensation for services, the recipient realizes ordinary income in the amount of the property's fair market value upon receipt (now I.R.C. § 61(a)(1), § 83(a)), and the payor is allowed an ordinary and necessary business expense deduction for the amount of compensation paid (now I.R.C. § 162; see also § 83(h)), subject to timing rules. Corporate nonrecognition rules for distributions with respect to stock (the former General Utilities doctrine) do not apply to payments for services.{" "}
Yes. The corporation realized taxable gain when it transferred appreciated property to employees in satisfaction of compensation obligations, measured by the excess of fair market value over basis. The employees realized ordinary income equal to the property's fair market value upon receipt, and the corporation's compensation deduction was measured by that same fair market value.
International Freighting is a cornerstone authority for the proposition that satisfying obligations with property triggers realization. It is routinely taught with Kenan v. Commissioner and functions as a canonical application of the substance-over-form approach in tax law. For modern students and practitioners, its rule has been codified in multiple provisions: § 1001 (realization on dispositions), § 311(b) (corporate recognition of gain on distributions of appreciated property, other than certain exceptions), and § 83/§ 162/§ 83(h) (timing and measurement of compensation income and the employer's corresponding deduction). The case also foreshadows later statutory carve-outs—such as § 1032 for a corporation's own stock—highlighting how Congress sometimes overrides general realization principles in specific contexts. Practically, the case warns employers that funding compensation with appreciated third-party property generates corporate-level gain even though a cash payment would not, and it teaches students to analyze both sides of a property-for-services exchange for symmetry of income, gain, basis, and deduction.