Burnet v. Logan

Brief Fact Summary. Respondent did not claim annual payments from an agreement arising from the sale of stock as income. Respondent claimed the annual payments to her should not count as income until they exceed the original value of the her capital investment in the stock.

Synopsis of Rule of Law. Profit is not required to be reported until it is actually realized.

Facts. Respondent, Mrs. Logan, owned 250 of 4000 shares of the Andrews & Hitchcock Iron Company. Andrews & Hitchcock owned 12% of the Mahoning Ore & Steel Company. Andrews & Hitchcock sold to Youngstown Sheet & Tube Company which acquired the 12% of the Mahoning Company. The Youngstown Company paid the holder $2.2 million in cash and agreed to pay annual disbursement of proceedings from mining. The Youngstown Company paid large sums out to Respondent for several years. Respondent did not report this as income arguing that such amounts should not be considered income until the total received equals the value of the shares on March 1, 1913.

Issue. Does the money received by Respondent have to be reported as income?

Held. Justice McReynolds issued the opinion for the Supreme Court of the United States in holding that the amounts do not have to be reported as income until it exceeds the original capital investment.

Discussion. The Supreme Court found that the transaction was still “open” and that until Respondent recoups the original capital investment, the annual payments should not count as taxable income. There was the possibility that Respondent might not ever recoup the original capital investment.