''Burnet v. Logan'', 283 U.S. 404 (1931), was a case before the
United States Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
.
Facts
Respondent, Mrs. Logan, before March 1913 and until March 11, 1916, owned shares in Andrews & Hitchcock Iron Company which in turn held 12% in Mahoning Ore & Steel Company which mined
iron ore
Iron ores are rocks and minerals from which metallic iron can be economically extracted. The ores are usually rich in iron oxides and vary in color from dark grey, bright yellow, or deep purple to rusty red. The iron is usually found in the fo ...
.
[.] 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.][''Burnet'', 283 U.S. at 410.] The respondent received this money over time but claimed that no income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable 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
The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by several ...
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".[''Burnet'', 283 U.S. at 411.] The Circuit Court of Appeals held that it was impossible to determine with certainty the fair market value of the agreement. Hence, the respondent was entitled to the return of her capital before she could be charged with any taxable income.[''Burnet'', 283 U.S. at 412.] Since her capital had not been returned, there was no taxable income Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. Th ...
.[
]
Holding
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 realized, then the taxpayer will be required to respond.][''Burnet'', 283 U.S. at 413.] 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 the return of capital and later profit. The liability for income tax can be fairly determined without resorting 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 bases have been recovered.
Significance
The 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 one gives up in an exchange, or, more generally, in an arm's length transaction, the fair market values of the transaction will be equal. However, this is a situation where neither value is known, and so the valuation of the transaction is left open. Even though this is still considered a good law, it has fallen by the wayside and is rarely used, partially because it is often considered too generous because one is deemed to have no income while recovering. 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.[S. Rep. No. 1000, 96th Cong., 2d Sess., reprinted in 1980-2 CB 494, 506-507.]
See also
* '' Youngstown Sheet & Tube Co. v. Sawyer'' (1952)
* List of United States Supreme Court cases, volume 283
References
External links
*
*
{{DEFAULTSORT:Burnet V. Logan
United States Supreme Court cases
United States Supreme Court cases of the Hughes Court
United States taxation and revenue case law
1931 in United States case law