Burnet v. Logan, , 51 S.Ct. 550, 75 L.Ed. 1143 was a case before the United States Supreme Court.

Facts

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 & 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

Income tax

An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

 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

Commissioner of Internal Revenue

The Commissioner of Internal Revenue is the head of the Internal Revenue Service , a bureau within the United States Department of the Treasury.The office of Commissioner was created by Congress by the Revenue Act of 1862...

 ruled that the obligation to pay 60 cents per ton had a fair market value

Fair market value

Fair market value is an estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or...

 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

United States court of appeals

The United States courts of appeals are the intermediate appellate courts of the United States federal court system...

 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

Taxable income

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

.

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 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.