Burnet v. Logan
This article needs attention from an expert in U.S. Supreme Court cases, Law or Taxation.October 2008)(
|Burnet v. Logan|
|Argued April 29, 1931|
Decided May 18, 1931
|Full case name||Burnet, Commissioner of Internal Revenue v. Logan|
|Citations||283 U.S. 404 (more)|
51 S. Ct. 550; 75 L. Ed. 1143
|Prior history||42 F.2d 193 (2d Cir. 1930)|
|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.|
Burnet v. Logan, 283 U.S. 404 (1931), was a case before the United States Supreme Court.
Respondent, Mrs. Logan, prior to March 1913 and until March 11, 1916, owned shares in Andrews & Hitchcock Iron Company which in turn held 12% in the Mahoning Ore & Steel Company which mined iron ore. Andrews & Hitchcock was later acquired by the Youngstown Sheet & Tube Company. Youngstown Sheet and Tube agreed to pay $2.2 million to the shareholders and 60 cents annually thereafter for each ton of ore apportioned to their shares. Respondent received this money over time, but claimed that no income tax should arise until she received the total amount of the sale of her stock equal to its value on March 1, 1913. The Commissioner of Internal Revenue ruled that the obligation to pay 60 cents per ton had a fair market value of almost $2 million, and “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.”. The Circuit Court of Appeals held that it was impossible to determine with certainty the fair market value of the agreement. Hence, respondent was entitled to the return of her capital before she could be charged with any taxable income. Since her capital had not been returned, there was no taxable income.
The U.S. Supreme Court agreed with the result reached by the Circuit Court of Appeals. When the profit of a transaction, if any, is actually realized, then taxpayer will be required to respond. In order to determine whether there is a gain or loss, the initial capital at the beginning of the period in consideration must first be recovered. As annual payments from extracted ore are paid, they can be apportioned as return of capital and later profit. The liability for income tax can be fairly determined without resort to conjecture. The initial promise has no ascertainable fair market value, so the transaction was not closed. Mrs. Logan may never have recouped her initial investments from payments that were promised to her. Based on the facts there is no way to fairly evaluate the promise of 60 cents a ton for an undisclosed portion of time. Therefore, income will only be included after all the basis has been recovered.
This case presents an example of an open transaction case. Philadelphia Park Amusement Co. v. United States tells us that commonly, the value of what one receives will be the value of what ones gives up in an exchange, or, more generally, in an arms length transaction the fair market values of the transaction will be equal. This, however is a situation where neither value is known, and so the valuation of the transaction is left open. Even though this is still considered good law, it has fallen by the wayside and is rarely used, partially because it is often considered too generous because one is deemed as having no income while one is recovering basis. Generally, the open transaction doctrine will only be used in the rare occurrence where the fair market value of a contingent payment obligation cannot be reasonably ascertained.
- Burnet v. Logan, 283 U.S. 404, 409 (1931).
- Burnet, 283 U.S. at 410.
- Burnet, 283 U.S. at 411.
- Logan v. Commissioner of Internal Revenue, 42 F.2d 193, 197 (2d Cir. 1930).
- Burnet, 283 U.S. at 412.
- Burnet, 283 U.S. at 413.
- Philadelphia Park Amusement Co. v. United States, 126 F. Supp. 184 (Ct. Cl. 1954).
- S. Rep. No. 1000, 96th Cong., 2d Sess., reprinted in 1980-2 CB 494, 506-507.