U.S. Supreme Court North American Oil Consolidated v.
Burnet, 286
U.S. 417 (1932) North American Oil Consolidated v.
Burnet No. 575 Argued April 20, 21,
1932 Decided May 23, 1932 286
U.S. 417 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE NINTH
CIRCUIT Syllabus 1. Section 13(c) of the Revenue Act of 1916, obliging receivers
"operating the property and business of corporations" to make
returns of net income "as and for such corporations," applied only
where a receiver was in complete control of the entire properties
and business of the corporation; otherwise, the return must be made
by the corporation. P. 286 U. S.
422 . Page 286 U. S. 418 2. Part of an operating property was taken over by a receiver in
a suit challenging the owner's title. Held, that the owner
need not report income as of the year when it was collected by the
receiver, while the right to it was in doubt, but must report it as
income of the year when the amount collected was paid over to him
and the bill dismissed. P. 286 U. S. 423 .

															3. The fact that appeals from the decree were not determined in
his favor until a later year did not defer the time for returning
the income. P. 286 U. S. 424 .

															50 F.2d 52 affirmed.

															Certiorari, 284 U.S. 614, to review a judgment reversing a
decision of the Board of Tax Appeals, 12 B.T.A. 68. Page 286 U. S. 420 MR. JUSTICE BRANDEIS delivered the opinion of the Court.

															The question for decision is whether the sum of $171,979.22,
received by the North American Oil Consolidated in 1917, was
taxable to it as income of that year.

															The money was paid to the company under the following
circumstances: among many properties operated by it in 1916 was a
section of oil land the legal title to which stood in the name of
the United States. Prior to that year, the government, claiming
also the beneficial Page 286 U. S. 421 ownership, had instituted a suit to oust the company from
possession, and on February 2, 1916, it secured the appointment of
a receiver to operate the property, or supervise its operations,
and to hold the net income thereof. The money paid to the company
in 1917 represented the net profits which had been earned from that
property in 1916 during the receivership. The money was paid to the
receiver as earned. After entry by the district court in 1917 of
the final decree dismissing the bill, the money was paid, in that
year, by the receiver to the company. United States v. North
American Oil Consolidated, 242 F. 723. The government took an
appeal (without supersedeas) to the Circuit Court of Appeals. In
1920, that court affirmed the decree. 264 F. 336. In 1922, a
further appeal to this Court was dismissed by stipulation. 258 U.S.
633.

															The income earned from the property in 1916 had been entered on
the books of the company as its income. It had not been included in
its original return of income for 1916; but it was included in an
amended return for that year which was filed in 1918. Upon auditing
the company's income and profits tax returns for 1917, the
Commissioner of Internal Revenue determined a deficiency based on
other items. The company appealed to the Board of Tax Appeals.
There, in 1927, the Commissioner prayed that the deficiency already
claimed should be increased so as to include a tax on the amount
paid by the receiver to the company in 1917. The Board held that
the profits were taxable to the receiver as income of 1916, and
hence made no finding whether the company's accounts were kept on
the cash receipts and disbursements basis or on the accrual basis.
12 B.T.A. 68. The Circuit Court of Appeals held that the profits
were taxable to the company as income of 1917, regardless of
whether the company's returns were made on the cash or on the Page 286 U. S. 422 accrual basis. 50 F.2d 752. This Court granted a writ of
certiorari. 284 U.S. 614.

															It is conceded that the net profits earned by the property
during the receivership constituted income. The company contends
that they should have been reported by the receiver for taxation in
1916; that, if not returnable by him, they should have been
returned by the company for 1916, because they constitute income of
the company accrued in that year, and that, if not taxable as
income of the company for 1916, they were taxable to it as income
for 1922, since the litigation was not finally terminated in its
favor until 1922. First. The income earned in 1916 and impounded by the
receiver in that year was not taxable to him, because he was the
receiver of only a part of the properties operated by the company.
Under § 13(c) of the Revenue Act of 1916, * receivers who
"are operating the property or business of corporations" were
obliged to make returns "of net income as and for such
corporations," and "any income tax due" was to be "assessed and
collected in the same manner as if assessed directly against the
organizations of whose businesses or properties they have custody
and control." The phraseology of this section was adopted without
change in the Revenue Act of 1918, 40 Stat. 1057, 1081, c. 18, §
239. The regulations of the Treasury Department have consistently
construed Page 286 U. S. 423 these statutes as applying only to receivers in charge of the
entire property or business of a corporation, and in all other
cases have required the corporations themselves to report their
income. Treas.Regs. 33, arts. 26, 209; Treas.Regs. 45, Arts. 424,
622. That construction is clearly correct. The language of the
section contemplates a substitution of the receiver for the
corporation, and there can be such substitution only when the
receiver is in complete control of the properties and business of
the corporation. Moreover, there is no provision for the
consolidation of the return of a receiver of part of a
corporation's property or business with the return of the
corporation itself. It may not be assumed that Congress intended to
require the filing of two separate returns for the same year, each
covering only a part of the corporate income without making
provision for consolidation so that the tax could be based upon the
income as a whole. Second. The net profits were not taxable to the company
as income of 1916. For the company was not required in 1916 to
report as income an amount which it might never receive. See
Burnet v. Logan, 283 U. S. 404 , 283 U. S. 413 . Compare Lucas v. American Code Co., 280 U.
S. 445 , 280 U. S. 452 ; Burnet v. Sanford & Brooks Co., 282 U.
S. 359 , 282 U. S. 363 .
There was no constructive receipt of the profits by the company in
that year, because at no time during the year was there a right in
the company to demand that the receiver pay over the money.
Throughout 1916, it was uncertain who would be declared entitled to
the profits. It was not until 1917, when the district court entered
a final decree vacating the receivership and dismissing the bill,
that the company became entitled to receive the money. Nor is it
material, for the purposes of this case, whether the company's
return was filed on the cash receipts and disbursements basis, or
on the accrual basis. In neither event was it taxable in 1916
on Page 286 U. S. 424 account of income which it had not yet received and which it
might never receive. Third. The net profits earned by the property in 1916
were not income of the year 1922 -- the year in which the
litigation with the government was finally terminated. They became
income of the company in 1917, when it first became entitled to
them and when it actually received them. If a taxpayer receives
earnings under a claim of right and without restriction as to its
disposition, he has received income which he is required to return,
even though it may still be claimed that he is not entitled to
retain the money, and even though he may still be adjudged liable
to restore its equivalent. See Board v. Commissioner, 51
F.2d 73, 75, 76. Compare United States v. S.S. White Dental
Mang. Co., 274 U. S. 398 , 274 U. S. 403 . If
in 1922 the government had prevailed, and the company had been
obliged to refund the profits received in 1917, it would have been
entitled to a deduction from the profits of 1922, not from those of
any earlier year. Compare Lucas v. American Code Co.,
supra. Affirmed. * Act of September 8, 1916, 39 Stat. 756, 771, c. 463:

															"In cases wherein receivers, trustees in bankruptcy, or
assignees are operating the property or business of corporations .
. . subject to tax imposed by this title, such receivers, trustees,
or assignees shall make returns of net income as and for such
corporations . . . in the same manner and form as such
organizations are hereinbefore required to make returns, and any
income tax due on the basis of such returns made by receivers,
trustees, or assignees shall be assessed and collected in the same
manner as if assessed directly against the organizations of whose
businesses or properties they have custody and control."


U.S. Supreme Court Burnet v. Logan, 283
U.S. 404 (1931) Burnet v. Logan Nos. 521 and 522 Argued April 29, 1931 Decided May 18, 1931 283
U.S. 404 CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT Syllabus 1. Prior to March, 1913, the taxpayer held shares in one of
several steel companies, owners of the stock of a company engaged
in mining ore under a long-term lease. The lease did not require
production of maximum or minimum tonnage or any definite payments.
By agreement among themselves, the steel companies were entitled to
share the ore extracted according to their stockholdings in the
mining company. In 1916, the taxpayer and her co-shareholders sold
their shares to another steel company, which thus became entitled
to participate in the ores thereafter taken from the leased mine.
The consideration for the sale was part cash and in part the
purchaser's agreement to pay annually thereafter for distribution
among the selling stockholders 60 cents for each ton of ore
apportioned to it. Held, that until the receipts by the
taxpayer under this contract shall have equalled the value of her
shares in March, 1913, they are return of capital, and are not
taxable in part as income. P. 283 U. S.
412 .

															2. Another of the vendor stockholders died in 1917, bequeathing
her interest in the payments to be made by the purchaser. Held that, prior to return of the amount at which the
bequest was valued for federal estate tax purposes, the payments
received by the legatee are not income. P. 283 U. S.
413 .

															42 F.2d 193, id. 197, affirmed.

															Certiorari, 282 U.S. 833, to review judgments reversing orders
of the Board of Tax Appeals determining income tax deficiencies. 12
B.T.A. 586. Page 283 U. S. 409 MR. JUSTICE McREYNOLDS delivered the opinion of the Court.

															These causes present the same questions. One opinion, stating
the essential circumstances disclosed in No. 521, will suffice for
both.

															Prior to March, 1913, and until March 11, 1916, respondent, Mrs.
Logan, owned 250 of the 4,000 capital shares issued by the Andrews
& Hitchcock Iron Company. It held 12 percent of the stock of
the Mahoning Ore & Steel Company, an operating concern. In
1895, the latter corporation procured a lease for 97 years upon the
"Mahoning" mine, and since then has regularly taken therefrom
large, but varying, quantities of iron ore -- in 1913, 1,515,428
tons; in 1914, 1,212,287 tons; in 1915, 2,311,940 tons; in 1919,
1,217, 167 tons; in 1921, 303,020 tons; in 1923, 3,029,865 tons.
The lease contract did not require production of either maximum or
minimum tonnage or any definite payments. Through an agreement of
stockholders (steel manufacturers), the Mahoning Company is
obligated to apportion extracted ore among them according to their
holdings. Page 283 U. S. 410 On March 11, 1916, the owners of all the shares in Andrews &
Hitchcock Company sold them to Youngstown Sheet & Tube Company,
which thus acquired, among other things, 12 percent of the Mahoning
Company's stock and the right to receive the same percentage of ore
thereafter taken from the leased mine.

															For the shares so acquired, the Youngstown Company paid the
holders $2,200,000 in money, and agreed to pay annually thereafter
for distribution among them 60 cents for each ton of ore
apportioned to it. Of this cash, Mrs. Logan received 250/4000 --
$137,500, and she became entitled to the same fraction of any
annual payment thereafter made by the purchaser under the terms of
sale.

															Mrs. Logan's mother had long owned 1,100 shares of the Andrews
& Hitchcock Company. She died in 1917, leaving to the daughter
one-half of her interest in payments thereafter made by the
Youngstown Company. This bequest was appraised for federal estate
tax purposes at $277,164.50.

															During 1917, 1918, 1919, and 1920, the Youngstown Company paid
large sums under the agreement. Out of these respondent received on
account of her 250 shares $9,900 in 1917; $11,250 in 1918;
$8,995.50 in 1919; $5,444.30 in 1920 -- $35,589.80. By reason of
the interest from her mother's estate, she received $19,790.10 in
1919, and $11,977.49 in 1920.

															Reports of income for 1918, 1919, and 1920 were made by Mrs.
Logan upon the basis of cash receipts and disbursements. They
included no part of what she had obtained from annual payments by
the Youngstown Company. She maintains that, until the total amount
actually received by her from the sale of her shares equals their
value on March 1, 1913, no taxable income will arise from the
transaction. Also that, until she actually receives by reason of
the right bequeathed to her a sum equal to its Page 283 U. S. 411 appraised value, there will be no taxable income therefrom.

															On March 1, 1913, the value of the 250 shares then held by Mrs.
Logan exceeded $173,089.80 -- the total of all sums actually
received by her prior to 1921 from their sale ($137,500 cash in
1916, plus four annual payments amounting to $35,589.80). That
value also exceeded original cost of the shares. The amount
received on the interest devised by her mother was less than its
valuation for estate taxation, also less than the value when
acquired by Mrs. Logan.

															The Commissioner ruled that the obligation of the Youngstown
Company to pay 60 cents per ton has a fair market value of
$1,942,111.46 on March 11, 1916; that this value should be treated
as so much cash, and the sale of the stock regarded as a closed
transaction with no profit in 1916. He also used this valuation as
the basis for apportioning subsequent annual receipts between
income and return of capital. His calculations, based upon
estimates and assumptions, are too intricate for brief statement. * He made
deficiency assessments according to the view just stated, and the
Board of Tax Appeals approved the result. Page 283 U. S. 412 The circuit court of appeals held that, in the circumstances, it
was impossible to determine with fair certainty the market value of
the agreement by the Youngstown Company to pay 60 cents per ton.
Also that respondent was entitled to the return of her capital --
the value of 250 shares on March 1, 1913, and the assessed value of
the interest derived from her mother -- before she could be charged
with any taxable income. As this had not in fact been returned,
there was no taxable income.

															We agree with the result reached by the circuit court of
appeals.

															The 1916 transaction was a sale of stock, not an exchange of
property. We are not dealing with royalties or deductions from
gross income because of depletion of mining property. Nor does the
situation demand that an effort be made to place according to the
best available data some approximate value upon the contract for
future payments. This probably was necessary in order to assess the
mother's estate. As annual payments on account of extracted ore
come in, they can be readily apportioned first as return of capital
and later as profit. The liability for income tax ultimately can be
fairly determined without resort to mere estimates, assumptions,
and speculation. Page 283 U. S. 413 When the profit, if any, is actually realized, the taxpayer will
be required to respond. The consideration for the sale was
$2,200,000 in cash and the promise of future money payments wholly
contingent upon facts and circumstances not possible to foretell
with anything like fair certainty. The promise was in no proper
sense equivalent to cash. It had no ascertainable fair market
value. The transaction was not a closed one. Respondent might never
recoup her capital investment from payments only conditionally
promised. Prior to 1921, all receipts from the sale of her shares
amounted to less than their value on March 1, 1913. She properly
demanded the return of her capital investment before assessment of
any taxable profit based on conjecture.

															"In order to determine whether there has been gain or loss, and
the amount of the gain if any, we must withdraw from the gross
proceeds an amount sufficient to restore the capital value that
existed at the commencement of the period under consideration." Doyle v. Mitchell Bros. Co., 247 U.
S. 179 , 247 U. S.
184 -185. Revenue Act 1916, § 2, 39 Stat. 757, 758;
Revenue Act 1918, c. 18, 40 Stat. 1057. Ordinarily, at least, a
taxpayer may not deduct from gross receipts a supposed loss which
in fact is represented by his outstanding note. Eckert v.
Commissioner, ante, p. 283 U. S. 140 .
And, conversely, a promise to pay indeterminate sums of money in
not necessarily taxable income. "Generally speaking, the income tax
law is concerned only with realized losses, as with realized
gains." Lucas v. American Code Co., 280 U.
S. 445 , 280 U. S.
449 .

															From her mother's estate, Mrs. Logan obtained the right to share
in possible proceeds of a contract thereafter to pay indefinite
sums. The value of this was assumed to be $277,164.50, and its
transfer was so taxed. Some valuation -- speculative or otherwise
-- was necessary in order to close the estate. It may never yield
as much, it may Page 283 U. S. 414 yield more. If a sum equal to the value thus ascertained had
been invested in an annuity contract, payments thereunder would
have been free from income tax until the owner had recouped his
capital investment. We think a like rule should be applied here.
The statute definitely excepts bequests from receipts which go to
make up taxable income. See Burnet v. Whitehouse, ante, p. 283 U. S. 148 .

															The judgments below are Affirmed. * In the brief for petitioner, the following appears:

															"The fair market value of the Youngstown contract on March 11,
1916, was found by the Commissioner to be $1,942,111.46. This was
based upon an estimate that the ore reserves at the Mahoning mine
amounted to 82,858,535 tons; that all such ore would be mined; that
12 percent (or 9,942,564.2 tons) would be delivered to the
Youngstown Company. The total amount to be received by all the
vendors of stock would then be $5,965,814.52 at the rate of 60
cents per ton. The Commissioner's figure for the fair market value
on March 11, 1916, was the then worth of $5,965,814.52, upon the
assumption that the amount was to be received in equal annual
installments during 45 years, discounted at 6 percent, with a
provision for a sinking fund at 4 percent. For lack of evidence to
the contrary, this value was approved by the Board. The value of
the 550/4000 interest which each acquired by bequest was fixed at
$277,164.50 for purposes of federal estate tax at the time of the
mother's death."

															During the years here involved, the Youngstown Company made
payments in accordance with the terms of the contract, and
respondents respectively received sums proportionate to the
interests in the contract which they acquired by exchange of
property and by bequest.

															The Board held that respondents' receipts from the contract,
during the years in question, represented "gross income;" that
respondents should be allowed to deduct from said gross income a
reasonable allowance for exhaustion of their contract interests,
and that the balance of the receipts should be regarded as taxable
income.


U.S. Supreme Court United States v. Kirby Lumber Co., 284 U.S. 1 (1931) United States v. Kirby Lumber
Co. No. 26 Argued October 21,
1931 Decided November 2,
1931 284 U.S.
1 CERTIORARI TO THE COURT OF
CLAIMS Syllabus Where a corporation purchased and retired some of its own bonds
for less than their par value, which it had received for them when
issued, the difference was a taxable gain or income under the
Revenue Act of 1921. P. 284 U. S. 3 .

															71 Ct.Cls. 290, 44 F.2d 885, reversed.

															Certiorari, 283 U.S. 814, to review a judgment allowing a claim
for refund of money collected as income tax. Page 284 U. S. 2 MR. JUSTICE HOLMES delivered the opinion of the court.

															In July, 1923, the plaintiff, the Kirby Lumber Company, issued
its own bonds for $12,126,800 for which it received their par
value. Later in the same year, it purchased in the open market some
of the same bonds at less than par, the difference of price being
$137,521.30. The question is whether this difference is a taxable
gain or income of the plaintiff for the year 1923. By the
Revenue Page 284 U. S. 3 Act of (November 23) 1921, c. 136, § 213(a), gross income
includes "gains or profits and income derived from any source
whatever," and, by the Treasury Regulations authorized by § 1303,
that have been in force through repeated reenactments,

															"If the corporation purchases and retires any of such bonds at a
price less than the issuing price or face value, the excess of the
issuing price or face value over the purchase price is gain or
income for the taxable year."

															Article 545(1)(c) of Regulations 62, under Revenue Act of 1921. See Article 544(1)(c) of Regulations 45, under Revenue Act
of 1918; Article 545(1)(c) of Regulations 65, under Revenue Act of
1924; Article 545(1)(c) of Regulations 69, under Revenue Act of
1926; Article 68(1)(c) of Regulations 74, under Revenue Act of
1928. We see no reason why the Regulations should not be accepted
as a correct statement of the law.

															In Bowers v. Kerbaugh-Empire Co., 271 U.
S. 170 , the defendant in error owned the stock of
another company that had borrowed money repayable in marks or their
equivalent for an enterprise that failed. At the time of payment,
the marks had fallen in value, which, so far as it went, was a gain
for the defendant in error, and it was contended by the plaintiff
in error that the gain was taxable income. But the transaction as a
whole was a loss, and the contention was denied. Here, there was no
shrinkage of assets, and the taxpayer made a clear gain. As a
result of its dealings, it made available $137,521.30 assets
previously offset by the obligation of bonds now extinct. We see
nothing to be gained by the discussion of judicial definitions. The
defendant in error has realized within the year an accession to
income, if we take words in their plain popular meaning, as they
should be taken here. Burnet v. Sanford & Brooks Co., 282 U. S. 359 , 282 U. S.
364 . Judgment reversed.


U.S. Supreme Court Helvering v. Horst, 311
U.S. 112 (1940) Helvering v. Horst No. 27 Argued October 25,
1940 Decided November 25,
1940 311
U.S. 112 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE SECOND
CIRCUIT Syllabus 1. Where, in 1934 and 1935, an owner of negotiable bonds, who
reported income on the cash receipts basis, detached from the bonds
negotiable interest coupons before their due date and delivered
them as a gift to his son, who, in the same year, collected them at
maturity, held that, under § 22 of the Revenue Act of
1934, and in the year that the interest payments were made, there
was a realization of income, in the amount of such payments,
taxable to the donor. P. 311 U. S.
117 .

															2. The dominant purpose of the income tax laws is the taxation
of income to those who earn or otherwise create the right to
receive it and who enjoy the benefit of it when paid. P. 311 U. S.
119 .

															3. The tax laid by the 1934 Revenue Act upon income "derived
from . . . wages or compensation for personal service, of whatever
kind and in whatever form paid . . . ; also from interest . . . "
cannot fairly be interpreted as not applying to income derived from
interest or compensation when he who is entitled to receive it
makes use of his power to dispose of it in procuring satisfactions
which he would otherwise procure only by the use of the money when
received. P. 311 U. S.
119 .

															4. This case distinguished from Blair v. Commissioner, 300 U. S. 5 , and
compared with Lucas v. Earl, 281 U.
S. 111 , and Burnet v. Leininger, 285 U.
S. 136 . Pp. 311 U. S.
118 -120.

															107 F.2d 906, reversed.

															Certiorari, 309 U.S. 650, to review the reversal of an order of
the Board of Tax Appeals, 39 B.T.A. 757, sustaining a determination
of a deficiency in income tax. Page 311 U. S. 114 MR. JUSTICE STONE delivered the opinion of the Court.

															The sole question for decision is whether the gift, during the
donor's taxable year, of interest coupons detached from the bonds,
delivered to the donee and later in the year paid at maturity, is
the realization of income taxable to the donor.

															In 1934 and 1935, respondent, the owner of negotiable bonds,
detached from them negotiable interest coupons shortly before their
due date and delivered them as a gift to his son, who, in the same
year, collected them at maturity. The Commissioner ruled that,
under the applicable § 22 of the Revenue Act of 1934, 48 Stat. 680,
686, the interest payments were taxable, in the years when paid, to
the respondent donor, who reported his income on the cash receipts
basis. The circuit court of appeals reversed the order of the Board
of Tax Appeals sustaining the tax. 107 F.2d 906; 39 B.T.A. 757. We
granted certiorari, 309 U.S. 650, because of the importance of the
question in the administration of the revenue laws and because of
an asserted conflict in principle of the decision below with that
of Lucas v. Earl, 281 U. S. 111 , and
with that of decisions by other circuit courts of appeals. See
Bishop v. Commissioner, 54 F.2d 298; Dickey v.
Burnet, 56 F.2d 917, 921; Van Meter v. Commissioner, 61 F.2d 817.

															The court below thought that, as the consideration for the
coupons had passed to the obligor, the donor had, by the gift,
parted with all control over them and their payment, and for that
reason the case was distinguishable Page 311 U. S. 115 from Lucas v. Earl, supra, and Burnet v.
Leininger, 285 U. S. 136 ,
where the assignment of compensation for services had preceded the
rendition of the services, and where the income was held taxable to
the donor.

															The holder of a coupon bond is the owner of two independent and
separable kinds of right. One is the right to demand and receive at
maturity the principal amount of the bond representing capital
investment. The other is the right to demand and receive interim
payments of interest on the investment in the amounts and on the
dates specified by the coupons. Together, they are an obligation to
pay principal and interest given in exchange for money or property
which was presumably the consideration for the obligation of the
bond. Here respondent, as owner of the bonds, had acquired the
legal right to demand payment at maturity of the interest specified
by the coupons and the power to command its payment to others which
constituted an economic gain to him.

															Admittedly not all economic gain of the taxpayer is taxable
income. From the beginning, the revenue laws have been interpreted
as defining "realization" of income as the taxable event, rather
than the acquisition of the right to receive it. And "realization"
is not deemed to occur until the income is paid. But the decisions
and regulations have consistently recognized that receipt in cash
or property is not the only characteristic of realization of income
to a taxpayer on the cash receipts basis. Where the taxpayer does
not receive payment of income in money or property, realization may
occur when the last step is taken by which he obtains the fruition
of the economic gain which has already accrued to him. Old
Colony Trust Co. v. Commissioner, 279 U.
S. 716 ; Corliss v. Bowers, 281 U.
S. 376 , 281 U. S. 378 . Cf. Burnet v. Wells, 289 U. S. 670 .

															In the ordinary case the taxpayer who acquires the right to
receive income is taxed when he receives it, regardless of the time
when his right to receive payment Page 311 U. S. 116 accrued. But the rule that income is not taxable until realized
has never been taken to mean that the taxpayer, even on the cash
receipts basis, who has fully enjoyed the benefit of the economic
gain represented by his right to receive income can escape taxation
because he has not himself received payment of it from his obligor.
The rule, founded on administrative convenience, is only one of
postponement of the tax to the final event of enjoyment of the
income, usually the receipt of it by the taxpayer, and not one of
exemption from taxation where the enjoyment is consummated by some
event other than the taxpayer's personal receipt of money or
property. Cf. Aluminum Castings Co. v. Routzahn, 282 U. S. 92 , 282 U. S. 98 .
This may occur when he has made such use or disposition of his
power to receive or control the income as to procure in its place
other satisfactions which are of economic worth. The question here
is whether, because one who in fact receives payment for services
or interest payments is taxable only on his receipt of the
payments, he can escape all tax by giving away his right to income
in advance of payment. If the taxpayer procures payment directly to
his creditors of the items of interest or earnings due him, see
Old Colony Trust Co. v. Commissioner, supra; Bowers v.
Kerbaugh-Empire Co., 271 U. S. 170 ; United States v. Kirby Lumber Co., 284 U. S.
1 , or if he sets up a revocable trust with income
payable to the objects of his bounty, §§ 166, 167, Corliss v.
Bowers, supra; cf. Dickey v. Burnet, 56 F.2d 917, 921, he does
not escape taxation because he did not actually receive the money. Cf. Douglas v. Willcuts, 296 U. S. 1 ; Helvering v. Clifford, 309 U. S. 331 .

															Underlying the reasoning in these cases is the thought that
income is "realized" by the assignor because he, who owns or
controls the source of the income, also controls the disposition of
that which he could have Page 311 U. S. 117 received himself and diverts the payment from himself to others
as the means of procuring the satisfaction of his wants. The
taxpayer has equally enjoyed the fruits of his labor or investment
and obtained the satisfaction of his desires whether he collects
and uses the income to procure those satisfactions or whether he
disposes of his right to collect it as the means of procuring them. Cf. Burnet v. Wells, supra. Although the donor here, by the transfer of the coupons, has
precluded any possibility of his collecting them himself, he has
nevertheless, by his act, procured payment of the interest, as a
valuable gift to a member of his family. Such a use of his economic
gain, the right to receive income, to procure a satisfaction which
can be obtained only by the expenditure of money or property would
seem to be the enjoyment of the income whether the satisfaction is
the purchase of goods at the corner grocery, the payment of his
debt there, or such nonmaterial satisfactions as may result from
the payment of a campaign or community chest contribution, or a
gift to his favorite son. Even though he never receives the money,
he derives money's worth from the disposition of the coupons which
he has used as money or money's worth in the procuring of a
satisfaction which is procurable only by the expenditure of money
or money's worth. The enjoyment of the economic benefit accruing to
him by virtue of his acquisition of the coupons is realized as
completely as it would have been if he had collected the interest
in dollars and expended them for any of the purposes named. Burnet v. Wells, supra. In a real sense, he has enjoyed compensation for money loaned or
services rendered, and not any the less so because it is his only
reward for them. To say that one who has made a gift thus derived
from interest or earnings paid to his donee has never enjoyed or
realized the fruits of his investment or labor because he has
assigned Page 311 U. S. 118 them instead of collecting them himself and then paying them
over to the donee is to affront common understanding and to deny
the facts of common experience. Common understanding and experience
are the touchstones for the interpretation of the revenue laws.

															The power to dispose of income is the equivalent of ownership of
it. The exercise of that power to procure the payment of income to
another is the enjoyment, and hence the realization, of the income
by him who exercises it. We have had no difficulty in applying that
proposition where the assignment preceded the rendition of the
services, Lucas v. Earl, supra; Burnet v. Leininger,
supra, for it was recognized in the Leininger case
that, in such a case, the rendition of the service by the assignor
was the means by which the income was controlled by the donor, and
of making his assignment effective. But it is the assignment by
which the disposition of income is controlled when the service
precedes the assignment, and, in both cases, it is the exercise of
the power of disposition of the interest or compensation, with the
resulting payment to the donee, which is the enjoyment by the donor
of income derived from them.

															This was emphasized in Blair v. Commissioner, 300 U. S. 5 , on
which respondent relies, where the distinction was taken between a
gift of income derived from an obligation to pay compensation and a
gift of income-producing property. In the circumstances of that
case, the right to income from the trust property was thought to be
so identified with the equitable ownership of the property from
which alone the beneficiary derived his right to receive the income
and his power to command disposition of it that a gift of the
income by the beneficiary became effective only as a gift of his
ownership of the property producing it. Since the gift was deemed
to be a gift of the property, the income from it was held to be the
income of the owner of the property, Page 311 U. S. 119 who was the donee, not the donor, a refinement which was
unnecessary if respondent's contention here is right, but one
clearly inapplicable to gifts of interest or wages. Unlike income
thus derived from an obligation to pay interest or compensation,
the income of the trust was regarded as no more the income of the
donor than would be the rent from a lease or a crop raised on a
farm after the leasehold or the farm had been given away. Blair
v. Commissioner, supra, 300 U. S. 12 -13,
and cases cited. See also Reinecke v. Smith, 289 U.
S. 172 , 289 U. S. 177 .
We have held without deviation that, where the donor retains
control of the trust property, the income is taxable to him
although paid to the donee. Corliss v. Bowers, supra. Cf. Helvering v. Clifford, supra. The dominant purpose of the revenue laws is the taxation of
income to those who earn or otherwise create the right to receive
it and enjoy the benefit of it when paid. See Corliss v.
Bowers, supra, 281 U. S. 378 ; Burnet v. Guggenheim, 288 U. S. 280 , 288 U. S. 283 .
The tax laid by the 1934 Revenue Act upon income "derived from . .
. wages, or compensation for personal service, of whatever kind and
in whatever form paid . . . ; also from interest . . ." therefore
cannot fairly be interpreted as not applying to income derived from
interest or compensation when he who is entitled to receive it
makes use of his power to dispose of it in procuring satisfactions
which he would otherwise procure only by the use of the money when
received.

															It is the statute which taxes the income to the donor although
paid to his donee. Lucas v. Earl, supra; Burnet v. Leininger,
supra. True, in those cases, the service which created the
right to income followed the assignment, and it was arguable that,
in point of legal theory, the right to the compensation vested
instantaneously in the assignor when paid, although he never
received it, while here, the right of the assignor to receive the
income Page 311 U. S. 120 antedated the assignment which transferred the right, and thus
precluded such an instantaneous vesting. But the statute affords no
basis for such "attenuated subtleties." The distinction was
explicitly rejected as the basis of decision in Lucas v.
Earl. It should be rejected here, for no more than in the Earl case can the purpose of the statute to tax the income
to him who earns or creates and enjoys it be escaped by
"anticipatory arrangements . . . however skilfully devised" to
prevent the income from vesting even for a second in the donor.

															Nor is it perceived that there is any adequate basis for
distinguishing between the gift of interest coupons here and a gift
of salary or commissions. The owner of a negotiable bond and of the
investment which it represents, if not the lender, stands in the
place of the lender. When, by the gift of the coupons, he has
separated his right to interest payments from his investment and
procured the payment of the interest to his donee, he has enjoyed
the economic benefits of the income in the same manner and to the
same extent as though the transfer were of earnings, and, in both
cases, the import of the statute is that the fruit is not to be
attributed to a different tree from that on which it grew. See
Lucas v. Earl, supra, 281
U. S. 115 . Reversed. The separate opinion of MR. JUSTICE McREYNOLDS.

															The facts were stipulated. In the opinion of the court below
(107 F.2d 907), the issues are thus adequately stated:

															"The petitioner owned a number of coupon bonds. The coupons
represented the interest on the bonds and were payable to bearer.
In 1934, he detached unmatured coupons of face value of $25,182.50
and transferred them by manual delivery to his son as a gift. The
coupons matured later on in the same year, and the son collected
the face amount, $25,182.50, as his own property. There Page 311 U. S. 121 was a similar transaction in 1935. The petitioner kept his books
on a cash basis. He did not include any part of the moneys
collected on the coupons in his income tax returns for these two
years. The son included them in his returns. The Commissioner added
the moneys collected on the coupons to the petitioner's taxable
income and determined a tax deficiency for each year. The Board of
Tax Appeals, three members dissenting, sustained the Commissioner,
holding that the amounts collected on the coupons were taxable as
income to the petitioner."

															The decision of the Board of Tax Appeals was reversed, and
properly so, I think.

															The unmatured coupons given to the son were independent
negotiable instruments, complete in themselves. Through the gift,
they became at once the absolute property of the donee, free from
the donor's control and in no way dependent upon ownership of the
bonds. No question of actual fraud or purpose to defraud the
revenue is presented.

															Neither Lucas v. Earl, 281 U.
S. 111 , nor Burnet v. Leininger, 285 U.
S. 136 , supports petitioner's view. Blair v.
Commissioner, 300 U. S. 5 , 300 U. S. 11 -12,
shows that neither involved an unrestricted completed transfer of
property. Helvering v. Clifford, 309 U.
S. 331 , 309 U. S.
335 -336, decided after the opinion below, is much relied
upon by petitioner, but involved facts very different from those
now before us. There, no separate thing was absolutely transferred
and put beyond possible control by the transferor. The court
affirmed that Clifford, both conveyor and trustee,

															"retained the substance of full enjoyment of all the rights
which previously he had in the property. . . . In substance, his
control over the corpus was in all essential respects the same
after the trust was created, as before. . . . With that control in
his hands, he would keep direct Page 311 U. S. 122 command over all that he needed to remain in substantially the
same financial situation as before."

															The general principles approved in Blair v.
Commissioner, 300 U. S. 5 , are
applicable and controlling. The challenged judgment should be
affirmed.

															THE CHIEF JUSTICE and MR. JUSTICE ROBERTS concur in this
opinion.


U.S. Supreme Court Spring City Foundry Co. v.
Commissioner, 292
U.S. 182 (1934) Spring City Foundry Co. v.
Commissioner Nos. 727 and 728 Argued April 3, 1934 Decided April 30,
1934 292
U.S. 182 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE SEVENTH
CIRCUIT Syllabus 1. Where accounts and income tax returns are on the accrual
basis, a debt owing the taxpayer for goods sold in the tax year is
returnable as gross income of that year even though ascertained in
that year to be partly worthless. Art. 35 of Regs. 45, under
Revenue Act of 1918, construed. P. 292 U. S.
184 .

															2. Section 234(a)(5) of the Revenue Act of 1918 authorized the
deduction of a debt ascertained to be worthless and charged off
within the taxable year; it did not authorize the deduction of the
whole or a part of a debt which was not then ascertained to be
worthless, but was recoverable in part, the amount that was
recoverable being still uncertain. P. 292 U. S.
185 .

															3. Section 234(a)(4) of the Revenue Act of 1918, providing for
deduction of "losses sustained during the taxable year," and
subdivision (5) of the same section providing for deduction of
debts ascertained to be worthless within the taxable year, are
mutually exclusive, and a debt excluded from deduction under (5)
cannot be deducted as a loss under (4). P. 292 U. S.
189 .

															4. If a statute is ambiguous, administrative construction
followed since its enactment is of great weight. P. 292 U. S.
189 .

															67 F.2d 385, 387, affirmed.

															Certiorari, 291 U.S. 656, to review judgments reversing an order
of the Board of Tax Appeals, 25 B.T.A. 822, allowing deduction of
part of a debt in an income tax assessment for the year 1920. Both
the taxpayer and the Commissioner appealed to the court below. Page 292 U. S. 183 MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.

															Petitioners for writs of certiorari were granted,

															"limited to the question whether a debt ascertained to be
partially worthless in 1920 was deductible in that year under
either § 234(a)(4) or § 234(a)(5) [of the Revenue Act of 1918, 40
Stat. 1077] and to the question whether the debt was returnable as
taxable income in that year to the extent that it was then
ascertained to be worthless."

															Petitioner kept its books during the year 1920 and filed its
income tax return for that year on the accrual basis. From March,
1920, to September, 1920, petitioner sold goods to the Cotta
Transmission Company for which the latter became indebted in the
amount of $39,983.27, represented by open account and unsecured
notes. In the latter part of 1920, the Cotta Company found itself
in financial straits. Efforts at settlement having failed, a
petition in bankruptcy was filed against the Company on December
23, 1920, and a receiver was appointed. In the spring of 1922, the
receiver paid to creditors, including petitioner, a dividend of 15
percent, and, in 1923, a second and final dividend of 12 1/2
percent

															Petitioner charged off on its books the entire debt on December
28, 1920, and claimed this amount as a deduction in its income tax
return for that year. It included as income in its returns for 1922
and 1923 the dividends received in those years. The Commissioner
disallowed the amount claimed as a deduction in 1920, but allowed
a Page 292 U. S. 184 deduction in 1923 of $28,715.76, the difference between the full
amount of the debt and the two dividends.

															On review of the deficiency assessed by the Commissioner for
1920, the Board of Tax Appeals found that the debt was not entirely
worthless at the time it was charged off. An offer had been made in
November, 1920, to purchase the assets of the debtor at 33 1/3
percent of the creditors' claims and the offer had been declined.
The Board concluded that, in view of all the circumstances,
including the probable expense of the receivership, the debt could
be regarded as uncollectible at the time of the charge-off, to the
extent of $28,715.76, and allowed a deduction for 1920 of that
amount. 25 B.T.A. 822. This ruling, contested by both the
Commissioner and the taxpayer, was reversed by the Circuit Court of
Appeals upon the ground that "there was in 1920 no authority for a
debt deduction unless the debt were worthless." 67 F.2d 385, 387.
In view of the conflict of decisions upon this point, [ Footnote 1 ] this Court granted writs of
certiorari limited as above stated.

															1. Petitioner first contends that the debt, to the extent that
it was ascertained in 1920 to be worthless, was not returnable as
gross income in that year -- that is, apart from any question of
deductions, it was not to be regarded as taxable income at all. We
see no merit in this contention. Keeping accounts and making
returns on the accrual basis, as distinguished from the cash basis,
import that it is the right to receive, and not the actual receipt,
that determines the inclusion of the amount in gross income. When
the right to receive an amount becomes Page 292 U. S. 185 fixed, the right accrues. When a merchandizing concern makes
sales, its inventory is reduced, and a claim for the purchase price
arises. Article 35 of Regulations 45 under the Revenue Act of 1918
provided:

															"In the case of a manufacturing, merchandising, or mining
business, 'gross income' means the total sales, less the cost of
goods sold, plus any income from investments and from incidental or
outside operations or sources. [ Footnote 2 ]"

															On an accrual basis, the "total sales" to which the regulation
refers are manifestly the accounts receivable arising from the
sales, and these accounts receivable, less the cost of the goods
sold, figure in the statement of gross income. If such accounts
receivable become uncollectible, in whole or part, the question is
one of the deduction which may be taken according to the applicable
statute. See United States v. Anderson, 269 U.
S. 422 , 269 U. S.
440 -441; American National Co. v. United
States, 274 U. S. 99 , 274 U. S.
102 -103; Brown v. Helvering, 291 U.
S. 193 , 291 U. S. 199 ; Rouss v. Bowers, 30 F.2d 628, 629. That is the question
here. It is not altered by the fact that the claim of loss relates
to an item of gross income which had accrued in the same year.

															2. Section 234(a)(5) of the Revenue Act of 1918 provided for the
deduction of worthless debts, in computing net income, as follows:
"Debts ascertained to be worthless and charged off within the
taxable year." Under this provision, the taxpayer could not
establish a right to the deduction simply by charging off the debt.
It must be ascertained to be worthless within the taxable year. In
this instance, in 1920, the debt was in suspense by reason of the
bankruptcy of the debtor, but it was not a total loss. What
eventually might be recovered upon it was uncertain, but recovery
to some extent was reasonably to be Page 292 U. S. 186 expected. The receiver continued the business, and substantial
amounts were subsequently realized for the creditors. In this view,
the Board of Tax Appeals decided that the petitioner did not
sustain a loss in 1920 "equal to the total amount of the debt," and
hence that the entire debt was not deductible in that year.

															The question, then, is whether petitioner was entitled to a
deduction in 1920 for the portion of the debt which ultimately, on
the winding up in bankruptcy, proved to be uncollectible. Such a
deduction of a part of the debt, the Government contends and the
Circuit Court of Appeals held, the Act of 1918 did not authorize.
The Government points to the literal meaning of the words of the
statute, to the established administrative construction, and to the
action of the Congress in recognition of that construction.
"Worthless," says the Government, means destitute of worth, of no
value or use. This was the interpretation of the statute by the
Treasury Department. Article 151 of Regulations 45 (made applicable
to corporations by Article 561) provided that "An account merely
written down" is not deductible. [ Footnote 3 ] To the same effect was the corresponding
provision of the regulations under the Revenue Act of 1916.
[ Footnote 4 ] Page 292 U. S. 187 The right to charge off and deduct a portion of a debt where,
during the taxable year, the debt was found to be recoverable only
in part, was granted by the Revenue Act of 1921. By that Act, §
234(a)(5), 42 Stat. 254, was changed so as to read:

															"Debts ascertained to be worthless and charged off within the
taxable year (or in the discretion of the Commissioner, a
reasonable addition to a reserve for bad debts), and, when
satisfied that a debt is recoverable only in part, the Commissioner
may allow such debt to be charged off in part."

															We think that the fair import of this provision, as contrasted
with the earlier one, is that the Congress, recognizing the
significance of the existing provision and its appropriate
construction by the Treasury Department, deliberately intended a
change in the law. Shwab v. Doyle, 258 U.
S. 529 , 258 U. S. 536 ; Russell v. United States, 278 U.
S. 181 , 278 U. S. 188 .

															This intent is shown clearly by the statement in the report of
the Committee on Ways and Means of the House of Representatives in
relation to the new provision. The Committee said explicitly:
"Under the present law, worthless debts are deductible in full or
not at all." [ Footnote 5 ] While
the change was struck out by the Finance Committee of the Senate,
the provision was restored on the floor of the Senate, and became a
law as proposed by the House. [ Footnote 6 ] Regulations 62, issued by the Treasury
Department Page 292 U. S. 188 under the Act of 1921, made a corresponding change in Article
151. The Treasury Department consistently adhered to the former
rule in dealing with deductions sought under the Act of 1918.
[ Footnote 7 ]

															In numerous decisions the Board of Tax Appeals has taken the
same view of the provision of the Act of 1918. [ Footnote 8 ] See e.g., Appeal of Steel
Cotton Mill Co., 1 B.T.A. 299, 302; Western Casket Co. v.
Commissioner, 12 B.T.A. 792, 797; Toccoa Furniture Co. v.
Commissioner, 12 B.T.A. 804, 805. The contrary result in the
instant case was reached in deference to the opinion expressed by
the Circuit Court of Appeals of the Second Circuit in Sherman
& Bryan, Inc. v. Commissioner, 35 F.2d 713, 716, and by
the Court of Appeals of the District of Columbia in Davidson
Grocery Co. v. Lucas, 59 App.D.C. 176, 37 F.2d 806, 808 --
views which are opposed to those of the Circuit Courts of Appeals
of the Eighth Circuit in Minnehaha National Bank v.
Commissioner, 28 F.2d 763, 764, and of the Fifth Circuit in Collin County National Bank v. Commissioner, 48 F.2d 207,
208.

															We are of opinion that § 234(a)(5) of the Revenue Act of 1918
authorized only the deduction of a debt ascertained to be worthless
and charged off within the taxable year; that it Page 292 U. S. 189 did not authorize the deduction of a debt which was not then
ascertained to be worthless but was recoverable in part, the amount
that was not recoverable being still uncertain. Here, in 1923, on
the winding up, the debt that then remained unpaid, after deducting
the dividends received, was ascertained to be worthless and the
Commissioner allowed deduction accordingly in that year.

															3. Petitioner also claims the right of deduction under §
234(a)(4) of the Revenue Act of 1918 providing for the deduction of
"losses sustained during the taxable year and not compensated for
by insurance or otherwise." We agree with the decision below that
this subdivision and the following subdivision (5) relating to
debts are mutually exclusive. We so assumed, without deciding the
point, in Lewellyn v. Electric Reduction Co., 275 U.
S. 243 , 275 U. S. 246 .
The making of the specific provision as to debts indicates that
these were to be considered as a special class, and that losses on
debts were not to be regarded as falling under the preceding
general provision. What was excluded from deduction under
subdivision (5) cannot be regarded as allowed under subdivision
(4). If subdivision (4) could be considered as ambiguous in this
respect, the administrative construction which has been followed
from the enactment of the statute -- that subdivision (4) did not
refer to debts -- would be entitled to great weight. We see no
reason for disturbing that construction.

															Petitioner insists that "good business practice" forbade the
inclusion in the taxpayer's assets of the account receivable in
question, or at least the part of it which was subsequently found
to be uncollectible. But that is not the question here. Questions
relating to allowable deductions under the income tax act are quite
distinct from matters which pertain to an appropriate showing
upon Page 292 U. S. 190 which credit is sought. It would have been proper for the
taxpayer to carry the debt in question in a suspense account
awaiting the ultimate determination of the amount that could be
realized upon it, and thus to indicate the status of the debt in
financial statements of the taxpayer's condition. But that proper
practice, in order to advise those from whom credit might be sought
of uncertainties in the realization of assets, does not affect the
construction of the statute, or make the debt deductible in 1920,
when the entire debt was not worthless, when the amount which would
prove uncollectible was not yet ascertained, rather than in 1923,
when that amount was ascertained and its deduction allowed.

															We conclude that the ruling of the Circuit Court of Appeals was
correct. Judgment affirmed. [ Footnote 1 ] See Sherman & Bryan, Inc. v. Commissioner, 35 F.2d
713, 716; Davidson Grocery Co. v. Lucas, 59 App.D.C. 176,
37 F.2d 806; Murchison National Bank v. Grissom, 50 F.2d
1056. Compare Minnehaha National Bank v. Commissioner, 28
F.2d 763; Collin County National Bank v. Commissioner, 48
F.2d 207, 208.

															[ Footnote 2 ]

															This provision has been carried forward in the regulations under
the later revenue acts. See Regulations 77, Article
55.

															[ Footnote 3 ]

															Article 151 of Regulations 45 provided:

															" Bad debts. -- An account merely written down or a debt
recognized as worthless prior to the beginning of the taxable year
is not deductible. Where all the surrounding and attendant
circumstances indicate that a debt is worthless and uncollectible
and that legal action to enforce payment would in all probability
not result in the satisfaction of execution on a judgment, a
showing of these facts will be sufficient evidence of the
worthlessness of the debt for the purpose of deduction. Bankruptcy
may or may not be an indication of the worthlessness of a debt, and
actual determination of worthlessness in such a case is sometimes
possible before, and at other times only when, a settlement in
bankruptcy shall have been had. . . ." See also Article 151 of Regulations 45 (Revised)
promulgated January 28, 1921.

															[ Footnote 4 ]

															Regulations 33 (Revised), Article 151.

															[ Footnote 5 ]

															H.Rep. No. 350, 67th Cong., 1st Sess., p. 11. The statement of
the Committee is:

															"Under the present law, worthless debts are deductible in full
or not at all, but Section 214 would authorize the Commissioner to
permit a deduction for debts recoverable only in part, or, in his
discretion, to recognize a reserve for bad debts -- a method of
providing for bad debts much less subject to abuse than the method
of writing off bad debts required by the present law."

															Section 214 related to deductions by individuals and contained
the same new provision as that inserted in § 234(a)(5), quoted in
the text, with respect to deductions by corporations.

															[ Footnote 6 ]

															S.Rep. No. 275, 67th Cong., 1st. Sess., p. 14; Cong.Rec. vol.
61, pt. 6, pp. 5814, 5939-5941, 6109, 6110; pt. 7, p. 6727.

															[ Footnote 7 ]

															In Treasury decision 3262, I-1, Cumulative Bulletin,
January-June, 1922, 152, 153, it was said:

															"No deduction shall be allowed for the part of a debt
ascertained to be worthless and charged off prior to January 1,
1921, unless and until the debt is ascertained to be totally
worthless and is finally charged off or charged down to a nominal
amount, or the loss is determined in some other manner by a closed
and completed transaction." See also A.R.R. 7895, III-2, Cumulative Bulletin, July
December, 1924, 114, 115; A.R. 8226, III-2, Cumulative Bulletin,
116, 119-121.

															[ Footnote 8 ]

															The members of the Board of Tax Appeals who dissented in the
instant case pointed out that the Board had

															"consistently held in at least twenty-three cases that, under
the Revenue Act of 1918, no deduction may be taken where a taxpayer
ascertains that a debt is recoverable only in part."

															25 B.T.A. p. 834.


U.S. Supreme Court Dixie Pine Products Co. v.
Commissioner, 320
U.S. 516 (1944) Dixie Pine Products Co. v.
Commissioner of Internal Revenue No. 84 Argued December 14, 15,
1943 Decided January 3,
1944 320
U.S. 516 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE FIFTH
CIRCIT Syllabus 1. A taxpayer who kept his books on the accrual basis deducted
on his income tax returns for 1937 state taxes assessed against him
during the taxable year. He was contesting in the state courts his
liability for the taxes, was later adjudged exempt therefrom, and
never actually paid them. Held that, under the Revenue Act
of 1936, the deduction was properly disallowed. P. 320 U. S.
519 .

															2. The Board of Tax Appeals applied the correct rule of law in
this case, and the court below properly refused to disturb its
determination. Dobson v. Commissioner, ante, p. 320 U. S. 489 . P. 320 U. S.
519 .

															134 F.2d 273 affirmed.

															Certiorari, post, p. 720, to review the affirmance of a
decision of the Board of Tax Appeals, 45 B.T.A. 286, which
sustained the Commissioner's determination of a tax deficiency. Page 320 U. S. 517 MR. JUSTICE ROBERTS delivered the opinion of the Court.

															The question presented concerns the propriety of the
respondent's disallowance of a deduction from income which
petitioner took in its federal income tax return for 1937.

															In 1936, the Mississippi taxing authorities declared that a
solvent used by petitioner in its business was gasoline within the
meaning of a state law defining gasoline and laying a tax upon its
receipt and use. Accordingly, a tax was assessed against the
petitioner with respect to the receipt and use of the solvent in
1936. Petitioner paid the tax, and, in the same year, brought suit
against the Motor Vehicle Commissioner of Mississippi alleging that
the solvent was not within the comprehension of the state law, and
that the Commissioner should be temporarily and permanently
enjoined from future collections of tax in respect of it. The
Commissioner's demurrer to the complaint was sustained but, on
appeal, the Supreme Court of Mississippi decided that, on the
pleadings, the solvent was not within the definition of gasoline
contained in the state statute. After this decision, petitioner
denied that it owed, and ceased and refused to pay, any gasoline
tax on solvent used by it.

															In December, 1937, on advice of counsel, petitioner (which kept
its books and filed its federal income tax returns on the accrual
basis) made book entries accruing gasoline tax assessed by the
Motor Vehicle Commissioner in 1937. The actual accrual entries were
made sometime between January 1 and March 15, 1938, as of December
31, Page 320 U. S. 518 1937, in the amount of approximately $21,000, and petitioner
deducted this amount from income in making its 1937 federal income
tax return, although the sum had not been, and never was, paid.

															In December, 1938, petitioner and the Attorney General of
Mississippi filed an agreed statement of facts in the state court
suit, and, in the same month, the trial judge entered a final
decree perpetually enjoining the Motor Vehicle Commissioner from
assessing gasoline tax on the solvent used by petitioner. This
decree was subsequently affirmed by the Supreme Court of
Mississippi. In its 1938 federal income tax return, petitioner, by
way of compensating entry, included the sum of $21,000 as income
and as a recovery, in view of the Mississippi trial court's decree
of December, 1938.

															The sole question is whether the Commissioner was right in
disallowing the deduction for the tax year 1937. The Board of Tax
Appeals held that he was, [ Footnote
1 ] and the court below affirmed its decision. [ Footnote 2 ] We took the case because of a
conceded conflict in principle with decisions in other circuits.
[ Footnote 3 ]

															Section 23(c) of the Revenue Act of 1936 [ Footnote 4 ] permits the deduction from gross
income of taxes "paid or accrued within the taxable year." Sections
41, 42, and 43 make provision for tax accounting on the accrual
basis, where the taxpayer keeps his books on that principle,
provided his method clearly reflects his income in any taxable
year.

															The provisions of the Revenue Act of 1936 worked no significant
change over earlier Acts respecting the permissible basis of
calculating annual taxable income. The applicable principles of
accounting on the accrual basis had Page 320 U. S. 519 been adduced and applied by the Board of Tax Appeals in numerous
decisions. [ Footnote 5 ] It has
never been questioned that a taxpayer who accounts on the accrual
basis may, and should, deduct from gross income a liability which
really accrues in the taxable year. [ Footnote 6 ] It has long been held that, in order truly to
reflect the income of a given year, all the events must occur in
that year which fix the amount and the fact of the taxpayer's
liability for items of indebtedness deducted though not paid,
[ Footnote 7 ] and this cannot be
the case where the liability is contingent and is contested by the
taxpayer. [ Footnote 8 ] Here,
the taxpayer was strenuously contesting liability in the courts
and, at the same time deducting the amount of the tax, on the
theory that the state's exaction constituted a fixed and certain
liability. This it could not do. It must, in the circumstances,
await the event of the state court litigation, and might claim a
deduction only for the taxable year in which its liability for the
tax was finally adjudicated. [ Footnote 9 ]

															To this effect are the decisions of the Board of Tax Appeals in
numerous cases, and the instant decision was in line with earlier
rulings as to proper tax accounting practice. Since the Board
applied the correct rule of law, its determination that the item in
question was not properly deducted on the accrual basis is entitled
to the finality indicated by Dobson v. Helvering, ante, p. 320 U. S. 489 . The
court below properly refused to disturb the Board's
determination. Affirmed. [ Footnote 1 ]

															45 B.T.A. 286.

															[ Footnote 2 ]

															134 F.2d 273.

															[ Footnote 3 ] Commissioner v. Central United Nat. Bank, 99 F.2d 568; J. A. Dougherty's Sons v. Commissioner, 121 F.2d 700; Davies' Estate v. Commissioner, 126 F.2d 294.

															[ Footnote 4 ]

															49 Stat. 1648, 1659.

															[ Footnote 5 ] See Lucas v. American Code Co., 1 and S. 445, notes 1
and | 1 and S.
445fn3|>3.

															[ Footnote 6 ] United States v. Anderson, 269 U.
S. 422 ; American National Co. v. United States, 274 U. S. 99 ; Niles-Bement-Pond Co. v. United States, 281 U.
S. 357 ; Aluminum Castings Co. v. Routzahn, 282 U. S. 92 ; cf. Continental Tie & Lumber Co. v. United States, 286 U. S. 290 .

															[ Footnote 7 ] United States v. Anderson, supra, 269 U. S.
441 .

															[ Footnote 8 ] Lucas v. American Code Co., supra, 280 U. S.
450 -451.

															[ Footnote 9 ] Cf. Brown v. Helvering, 291 U.
S. 193 .


U.S. Supreme Court Welch v. Helvering, 290
U.S. 111 (1933) Welch v. Helvering No. 33 Argued October 19,
1933 Decided November 6,
1933 290
U.S. 111 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE EIGHTH
CIRCUIT Syllabus 1. What are "ordinary and necessary expenses" in carrying on a
business, within the meaning of provisions of Revenue Acts allowing
deductions of such expenses in computing net income, must be
determined by conduct and forms of speech prevailing in the
business world. P. 290 U. S.
113 .

															2. The Court cannot say, in the absence of proof and as a matter
of judicial knowledge, that payments on the debts of a corporation,
made by its former officer after its discharge in bankruptcy and
for the purpose of strengthening his own business standing and
credit were ordinary and necessary expenses of his business. P. 290 U. S.
115 . Page 290 U. S. 112 3. A finding by the Commissioner of Internal Revenue that such
payments are not ordinary and necessary expenses of a taxpayer, and
hence not deductible under the revenue acts and regulations in
computing his net income, is presumptively correct. P. 290 U. S.
115 .

															63 F.2d 976 affirmed.

															Certiorari, 289 U.S. 720, to review a judgment of the Circuit
Court of Appeals which affirmed the action of the Board of Tax
Appeals, 25 B.T.A. 117, disallowing certain deductions in an income
tax return.

															MR. JUSTICE CARDOZO delivered the opinion of the Court.

															The question to be determined is whether payments by a taxpayer,
who is in business as a commission agent, are allowable deductions
in the computation of his income if made to the creditors of a
bankrupt corporation in an endeavor to strengthen his own standing
and credit.

															In 1922, petitioner was the secretary of the E. L. Welch
Company, a Minnesota corporation, engaged in the grain business.
The company was adjudged an involuntary bankrupt, and had a
discharge from its debts. Thereafter the petitioner made a contract
with the Kellogg Company to purchase grain for it on a commission.
In order to reestablish his relations with customers whom he had
known when acting for the Welch Company and to solidify his credit
and standing, he decided to pay the debts of the Welch business so
far as he was able. In fulfillment of that resolve, he made
payments of substantial amounts during five successive years. In
1924, the commissions Page 290 U. S. 113 were $18,028.20, the payments $3,975.97; in 1925, the
commissions $31,377.07, the payments $11,968.20; in 1926, the
commissions $20,925.25, the payments $12,815.72; in 1927, the
commissions $22,119.61, the payments $7,379.72, and in 1928, the
commissions $26,177.56, the payments $11,068.25. The Commissioner
ruled that these payments were not deductible from income as
ordinary and necessary expenses, but were rather in the nature of
capital expenditures, an outlay for the development of reputation
and goodwill. The Board of Tax Appeals sustained the action of the
Commissioner (25 B.T.A. 117), and the Court of Appeals for the
Eighth Circuit affirmed. 63 F.2d 976. The case is here on
certiorari.

															"In computing net income, there shall be allowed as deductions .
. . all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business."

															Revenue Act of 1924, c. 234, 43 Stat. 253, 269, § 214, 26 U.S.C.
§ 955; Revenue Act of 1926, c. 27, 44 Stat. 9, 26, § 214, 26
U.S.C.App. § 955; Revenue Act of 1928, c. 852, 45 Stat. 791, 799, §
23(a); cf. Treasury Regulations 65, Arts. 101, 292, under
the Revenue Act of 1924, and similar regulations under the acts of
1926 and 1928.

															We may assume that the payments to creditors of the Welch
Company were necessary for the development of the petitioner's
business, at least in the sense that they were appropriate and
helpful. McCulloch v.
Maryland , 4 Wheat. 316. He certainly thought they
were, and we should be slow to override his judgment. But the
problem is not solved when the payments are characterized as
necessary. Many necessary payments are charges upon capital. There
is need to determine whether they are both necessary and ordinary.
Now, what is ordinary, though there must always be a strain of
constancy within it, is nonetheless a variable affected by time and
place Page 290 U. S. 114 and circumstance. "Ordinary" in this context does not mean that
the payments must be habitual or normal in the sense that the same
taxpayer will have to make them often. A lawsuit affecting the
safety of a business may happen once in a lifetime. The counsel
fees may be so heavy that repetition is unlikely. Nonetheless, the
expense is an ordinary one because we know from experience that
payments for such a purpose, whether the amount is large or small,
are the common and accepted means of defense against attack. Cf. Kornhauser v. United States, 276 U.
S. 145 . The situation is unique in the life of the
individual affected, but not in the life of the group, the
community, of which he is a part. At such times, there are norms of
conduct that help to stabilize our judgment, and make it certain
and objective. The instance is not erratic, but is brought within a
known type.

															The line of demarcation is now visible between the case that is
here and the one supposed for illustration. We try to classify this
act as ordinary or the opposite, and the norms of conduct fail us.
No longer can we have recourse to any fund of business experience,
to any known business practice. Men do at times pay the debts of
others without legal obligation or the lighter obligation imposed
by the usages of trade or by neighborly amenities, but they do not
do so ordinarily, not even though the result might be to heighten
their reputation for generosity and opulence. Indeed, if language
is to be read in its natural and common meaning ( Old Colony R.
Co. v. Commissioner, 284 U. S. 552 , 284 U. S. 560 ; Woolford Realty Co. v. Rose, 286 U.
S. 319 , 286 U. S.
327 ), we should have to say that payment in such
circumstances, instead of being ordinary, is in a high degree
extraordinary. There is nothing ordinary in the stimulus evoking
it, and none in the response. Here, indeed, as so often in other
branches of the law, the decisive distinctions are those of degree,
and not of kind. Page 290 U. S. 115 One struggles in vain for any verbal formula that will supply a
ready touchstone. The standard set up by the statute is not a rule
of law; it is rather a way of life. Life in all its fullness must
supply the answer to the riddle.

															The Commissioner of Internal Revenue resorted to that standard
in assessing the petitioner's income, and found that the payments
in controversy came closer to capital outlays than to ordinary and
necessary expenses in the operation of a business. His ruling has
the support of a presumption of correctness, and the petitioner has
the burden of proving it to be wrong. Wickwire v.
Reinecke, 275 U. S. 101 ; Jones v. Commissioner, 38 F.2d 550, 552. Unless we can say
from facts within our knowledge that these are ordinary and
necessary expenses according to the ways of conduct and the forms
of speech prevailing in the business world, the tax must be
confirmed. But nothing told us by this record or within the sphere
of our judicial notice permits us to give that extension to what is
ordinary and necessary. Indeed, to do so would open the door to
many bizarre analogies. One man has a family name that is clouded
by thefts committed by an ancestor. To add to this own standing he
repays the stolen money, wiping off, it may be, his income for the
year. The payments figure in his tax return as ordinary expenses.
Another man conceives the notion that he will be able to practice
his vocation with greater ease and profit if he has an opportunity
to enrich his culture. Forthwith the price of his education becomes
an expense of the business, reducing the income subject to
taxation. There is little difference between these expenses and
those in controversy here. Reputation and learning are akin to
capital assets, like the goodwill of an old partnership. Cf.
Colony Coal & Coke Corp. v. Commissioner, 52 F.2d 923. For
many, they are the only tools with which to hew a pathway Page 290 U. S. 116 to success. The money spent in acquiring them is well and wisely
spent. It is not an ordinary expense of the operation of a
business.

															Many cases in the federal courts deal with phases of the problem
presented in the case at bar. To attempt to harmonize them would be
a futile task. They involve the appreciation of particular
situations at times with border-line conclusions. Typical
illustrations are cited in the margin. * The decree should be Affirmed. * Ordinary expenses: Commissioner v. People's Pittsburgh
Trust Co., 60 F.2d 187, expenses incurred in the defense of a
criminal charge growing out of the business of the taxpayer; American Rolling Mill Co. v. Commissioner, 41 F.2d 314,
contributions to a civic improvement fund by a corporation
employing half of the wage earning population of the city, the
payments being made, not for charity, but to add to the skill and
productivity of the workmen ( cf. the decisions collated in
30 Columbia Law Review 1211, 1212, and the distinctions there
drawn); Corning Glass Works v. Lucas, 59 App.D.C. 168, 37
F.2d 798, donations to a hospital by a corporation whose employees
with their dependents made up two-thirds of the population of the
city; Harris & Co. v. Lucas, 48 F.2d 187, payments of
debts discharged in bankruptcy, but subject to be revived by force
of a new promise. Cf. Lucas v. Ox Fibre Brush Co., 281 U. S. 115 ,
where additional compensation, reasonable in amount, was allowed to
the officers of a corporation for services previously rendered.

															Not ordinary expenses: Hubinger v. Commissioner, 36
F.2d 724, payments by the taxpayer for the repair of fire damage,
such payments being distinguished from those for wear and tear; Lloyd v. Commissioner, 55 F.2d 842, counsel fees incurred
by the taxpayer, the president of a corporation, in prosecuting a
slander suit to protect his reputation and that of his business; One Hundred Five West Fifty-Fifth Street v. Commissioner, 42 F.2d 849, and Blackwell Oil & Gas Co. v.
Commissioner, 60 F.2d 257, gratuitous payments to stockholders
in settlement of disputes between them, or to assume the expense of
a lawsuit in which they had been made defendants; White v.
Commissioner, 61 F.2d 726, payments in settlement of a lawsuit
against a member of a partnership, the effect being to enable him
to devote his undivided efforts to the partnership business and
also to protect its credit.


U.S. Supreme Court United States v. Lewis, 340
U.S. 590 (1951) United States v.
Lewis No. 347 Argued March 2, 1951 Decided March 26,
1951 340
U.S. 590 CERTIORARI TO THE COURT OF
CLAIMS Syllabus In his 1944 income tax return, respondent reported $22,000
received that year as an employee's bonus, which he claimed in good
faith and used unconditionally as his own. In subsequent
litigation, it was decided that the bonus had been computed
improperly, and, under compulsion of a judgment, respondent
returned $11,000 to his employer in 1946. He then sued in the Court
of Claims for refund of an alleged overpayment of his 1944 income
tax. Held: under the "claim of right" doctrine announced in North American Oil v. Burnet, 286 U.
S. 417 , the entire $22,000 was income in 1944, and
respondent was not entitled to recompute his 1944 tax. Pp. 340 U. S.
590 -592.

															117 Ct.Cl. 336, 91 F. Supp. 1017, reversed.

															The case is stated in the opinion. The judgment below is reversed, p. 340 U. S.
592 .

															MR. JUSTICE BLACK delivered the opinion of the Court.

															Respondent Lewis brought this action in the Court of Claims
seeking a refund of an alleged overpayment of his 1944 income tax.
The facts found by the Court of Claims are: in his 1944 income tax
return, respondent reported about $22,000 which he had received
that year as an employee's bonus. As a result of subsequent
litigation in a state court, however, it was decided that
respondent's bonus had been improperly computed; under compulsion
of the state court's judgment, he returned approximately $11,000 to
his employer. Until payment Page 340 U. S. 591 of the judgment in 1946, respondent had at all times claimed and
used the full $22,000 unconditionally as his own, in the good faith
though "mistaken" belief that he was entitled to the whole
bonus.

															On the foregoing facts, the Government's position is that
respondent's 1944 tax should not be recomputed, but that respondent
should have deducted the $11,000 as a loss in his 1946 tax return. See G.C.M. 16730, XV-1 Cum.Bull. 179 (1936). The Court of
Claims, however, relying on its own case, Greenwald v. United
States, 102 Ct.Cl. 272, 57 F. Supp. 569, held that the excess
bonus received "under a mistake of fact" was not income in 1944,
and ordered a refund based on a recalculation of that year's tax.
117 Ct.Cl. 336, 91 F. Supp. 1017, 1022. We granted certiorari, 340
U.S. 903, because this holding conflicted with many decisions of
the courts of appeals, see, e.g., Haberkorn v. United
States, 173 F.2d 587, and with principles announced in North American Oil Consolidated v. Burnet, 286 U.
S. 417 .

															In the North American Oil case, we said:

															"If a taxpayer receives earnings under a claim of right and
without restriction as to its disposition, he has received income
which he is required to return, even though it may still be claimed
that he is not entitled to retain the money, and even though he may
still be adjudged liable to restore its equivalent."

															286 U.S. at 286 U. S. 424 .
Nothing in this language permits an exception merely because a
taxpayer is "mistaken" as to the validity of his claim. Nor has the
"claim of right" doctrine been impaired, as the Court of Claims
stated, by Freuler v. Helvering, 291 U. S.
35 , or Commissioner v. Wilcox, 327 U.
S. 404 . The Freuler case involved an entirely
different section of the Internal Revenue Code, and its holding is
inapplicable here. 291 U.S. at 291 U. S. 43 .
And in Commissioner v. Wilcox, supra, we held that
receipts from embezzlement did not constitute income,
distinguishing North American Oil on the ground Page 340 U. S. 592 that an embezzler asserts no " bona fide legal or
equitable claim." 327 U.S. at 327 U. S.
408 .

															Income taxes must be paid on income received (or accrued) during
an annual accounting period. Cf. I.R.C. §§ 41, 42, and
see Burnet v. Sanford & Brooks Co., 282 U.
S. 359 , 282 U. S. 363 .
The "claim of right" interpretation of the tax laws has long been
used to give finality to that period, and is now deeply rooted in
the federal tax system. See cases collected in 2 Mertens,
Law of Federal Income Taxation, § 12.103. We see no reason why the
Court should depart from this well settled interpretation merely
because it results in an advantage or disadvantage to a taxpayer. * Reversed. * It has been suggested that it would be more "equitable" to
reopen respondent's 1944 tax return. While the suggestion might
work to the advantage of this taxpayer, it could not be adopted as
a general solution, because, in many cases, the three-year statute
of limitations would preclude recovery. I.R.C. § 322(b).

															MR. JUSTICE DOUGLAS, dissenting.

															The question in this case is not whether the bonus had to be
included in 1944 income for purposes of the tax. Plainly it should
have been, because the taxpayer claimed it as of right. Some years
later, however, it was judicially determined that he had no claim
to the bonus. The question is whether he may then get back the tax
which he paid on the money.

															Many inequities are inherent in the income tax. We multiply them
needlessly by nice distinctions which have no place in the
practical administration of the law. If the refund were allowed,
the integrity of the taxable year would not be violated. The tax
would be paid when due, but the government would not be permitted
to maintain the unconscionable position that it can keep the tax
after it is shown that payment was made on money which was not
income to the taxpayer.


U.S. Supreme Court Hort v. Commissioner, 313 U.S.
28 (1941) Hort v. Commissioner No. 517 Argued March 7, 1941 Decided March 31,
1941 313 U.S.
28 CERTIORARI TO THE CIRCUIT COURT OF
APPEALS FOR THE SECOND
CIRCUIT Syllabus 1. An amount received by a lessor in consideration of the
cancellation of a lease of real estate is income taxable to him
under § 22(a) of the Revenue Act of 1932, and must be reported as
gross income in its entirety. P. 313 U. S.
30 .

															2. Although the amount so received be less than the difference
between the present value of the unmatured rental payments and the
fair rental value of the property for the unexpired period of the
lease, there is no loss deductible under § 23(e) of the Act. P. 313 U. S.
32 .

															3. Even though the lease be regarded as "property," the
consideration received for its cancellation is not, for the
purposes of the Revenue Act of 1932, a return of capital. P. 313 U. S.
31 .

															112 F.2d 167 affirmed.

															Certiorari, 311 U.S. 641, to review the affirmance of a decision
of the Board of Tax Appeals, 39 B.T.A. 922, sustaining the
determination of a deficiency in income tax.

															MR. JUSTICE MURPHY delivered the opinion of the Court.

															We must determine whether the amount petitioner received as
consideration for cancellation of a lease of realty in New York
City was ordinary gross income as Page 313 U. S. 29 defined in § 22(a) of the Revenue Act of 1932, 47 Stat. 169,
178, and whether, in any event, petitioner sustained a loss through
cancellation of the lease which is recognized in § 23(e) of the
same Act, 47 Stat. 169, 180.

															Petitioner acquired the property, a lot and ten-story office
building, by devise from his father in 1928. At the time he became
owner, the premises were leased to a firm which had sublet the main
floor to the Irving Trust Co. In 1927, five years before the head
lease expired, the Irving Trust Co. and petitioner's father
executed a contract in which the latter agreed to lease the main
floor and basement to the former for a term of fifteen years at an
annual rental of $25,000, the term to commence at the expiration of
the head lease.

															In 1933, the Irving Trust Co. found it unprofitable to maintain
a branch in petitioner's building. After some negotiations,
petitioner and the Trust Co. agreed to cancel the lease in
consideration of a payment to petitioner of $140,000. Petitioner
did not include this amount in gross income in his income tax
return for 1933. On the contrary, he reported a loss of $21,494.75
on the theory that the amount he received as consideration for the
cancellation was $21,494.75 less than the difference between the
present value of the unmatured rental payments and the fair rental
value of the main floor and basement for the unexpired term of the
lease. He did not deduct this figure, however, because he reported
other losses in excess of gross income.

															The Commissioner included the entire $140,000 in gross income,
disallowed the asserted loss, made certain other adjustments not
material here, and assessed a deficiency. The Board of Tax Appeals
affirmed. 39 B.T.A. 922. The Circuit Court of Appeals affirmed per
curiam on the authority of Warren Service Corp. v.
Helvering, 110 F.2d 723. 112 F.2d 167. Because of conflict
with Commissioner v. Langwell Real Estate Corp., 47 F.2d
841, we Page 313 U. S. 30 granted certiorari limited to the question whether,

															"in computing net gain or loss for income tax purposes, a
taxpayer [can] offset the value of the lease canceled against the
consideration received by him for the cancellation."

															311 U.S. 641.

															Petitioner apparently contends that the amount received for
cancellation of the lease was capital, rather than ordinary income,
and that it was therefore subject to §§ 101, 111-113, and 117, 47
Stat. 169, 191, 195-202, 207, which govern capital gains and
losses. Further, he argues that, even if that amount must be
reported as ordinary gross income, he sustained a loss which $23(e)
authorizes him to deduct. We cannot agree.

															The amount received by petitioner for cancellation of the lease
must be included in his gross income in its entirety. Section
22(a), copied in the margin, [ Footnote 1 ] expressly defines gross income to include
"gains, profits, and income derived from . . . rent, . . . or gains
or profits and income from any source whatever." Plainly this
definition reached the rent paid prior to cancellation, just as it
would have embraced subsequent payments if the lease had never been
canceled. It would have included a prepayment of the discounted
value of unmatured rental payments whether received at the
inception of the lease or at any time thereafter. Similarly, it
would have extended to the proceeds of a suit to recover damages
had the Irving Trust Co. breached the lease instead Page 313 U. S. 31 of concluding a settlement. Compare United States v. Safety
Car Heating Co., 297 U. S. 88 ; Burnet v. Sanford & Brooks Co., 282 U.
S. 359 . That the amount petitioner received resulted
from negotiations ending in cancellation of the lease, rather than
from a suit to enforce it, cannot alter the fact that basically the
payment was merely a substitute for the rent reserved in the lease.
So far as the application of $22(a) is concerned, it is immaterial
that petitioner chose to accept an amount less than the strict
present value of the unmatured rental payments, rather than to
engage in litigation, possibly uncertain and expensive.

															The consideration received for cancellation of the lease was not
a return of capital. We assume that the lease was "property,"
whatever that signifies abstractly. Presumably the bond in Helvering v. Horst, 311 U. S. 112 , and
the lease in Helvering v. Bruun, 309 U.
S. 461 , were also "property," but the interest coupon in Horst and the building in Bruun nevertheless were
held to constitute items of gross income. Simply because the lease
was "property," the amount received for its cancellation was not a
return of capital, quite apart from the fact that "property" and
"capital" are not necessarily synonymous in the Revenue Act of 1932
or in common usage. Where, as in this case, the disputed amount was
essentially a substitute for rental payments which § 22(a)
expressly characterizes as gross income, it must be regarded as
ordinary income, and it is immaterial that, for some purposes, the
contract creating the right to such payments may be treated as
"property" or "capital."

															For the same reasons, that amount was not a return of capital
because petitioner acquired the lease as an incident of the realty
devised to him by his father. Theoretically, it might have been
possible in such a case to value realty and lease separately, and
to label each a capital asset. Compare Maass v. Higgins, 312 U. S. 443 ; Page 313 U. S. 32 Appeal of Farmer, 1 B.T.A. 711. But that would not have
converted into capital the amount petitioner received from the
Trust Co., since § 22(b)(3) [ Footnote 2 ] of the 1932 Act, 47 Stat. 169, 178, would have
required him to include in gross income the rent derived from the
property, and that section, like § 22(a), does not distinguish
rental payments and a payment which is clearly a substitute for
rental payments.

															We conclude that petitioner must report as gross income the
entire amount received for cancellation of the lease, without
regard to the claimed disparity between that amount and the
difference between the present value of the unmatured rental
payments and the fair rental value of the property for the
unexpired period of the lease. The cancellation of the lease
involved nothing more than relinquishment of the right to future
rental payments in return for a present substitute payment and
possession of the leased premises. Undoubtedly it diminished the
amount of gross income petitioner expected to realize, but, to that
extent, he was relieved of the duty to pay income tax. Nothing in §
23(e) [ Footnote 3 ] indicates
that Page 313 U. S. 33 Congress intended to allow petitioner to reduce ordinary income
actually received and reported by the amount of income he failed to
realize. See Warren Service Corp. v. Helvering, supra; Josey v.
Commissioner, 104 F.2d 453; Tiscornia v.
Commissioner, 95 F.2d 678; Farrelly Walsh, Inc. v.
Commissioner, 13 B.T.A. 923; Georcke Co. v. Commissioner, 7 B.T.A.
860; Merckens v. Commissioner, 7 B.T.A. 32. Compare United
States v. Safety Car Heating Co., supra; Voliva v.
Commissioner, 36 F.2d 212; Appeal of Denholm & McKay Co.,
2 B.T.A. 444. We may assume that petitioner was injured insofar as
the cancellation of the lease affected the value of the realty. But
that would become a deductible loss only when its extent had been
fixed by a closed transaction. Regulations No. 77, Art. 171, p. 46; United States v. White Dental Mfg. Co., 274 U.
S. 398 .

															The judgment of the Circuit Court of Appeals is affirmed.

															[ Footnote 1 ]

															Sec. 22(a).

															"'Gross income' includes gains, profits, and income derived from
salaries, wages, or compensation for personal service, of whatever
kind and in whatever form paid, or from professions, vocations,
trades, businesses, commerce, or sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or
interest in such property; also from interest, rent, dividends,
securities, or the transaction of any business carried on for gain
or profit, or gains or profits and income derived from any source
whatever."

															[ Footnote 2 ]

															Sec. 22(b).

															"The following items shall not be included in gross income and
shall be exempt from taxation under this title:"

															" * * * *" "(3) The value of property acquired by gift, bequest, devise, or
inheritance (but the income from such property shall be included in
gross income)."

															[ Footnote 3 ]

															Sec. 23(e).

															"Subject to the limitations provided in subsection (r) of this
section, in the case of an individual, losses sustained during the
taxable year, and not compensated for by insurance or otherwise
[shall be deductible from gross income] --"

															"(1) if incurred in trade or business; or"

															"(2) if incurred in any transaction entered into for profit,
though not connected with the trade or business; or"

															"(3) of property not connected with the trade or business, if
the loss arises from fires, storms, shipwreck, or other casualty,
or from theft. No loss shall be allowed as a deduction under this
paragraph if, at the time of the filing of the return, such loss
has been claimed as a deduction for estate tax purposes in the
estate tax return."