Burnet v. Logan Case Brief Summary | Law Case Explained

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Burnet v. Logan, 283 U.S. 404 (1931)
The federal income tax code only applies to realized gains or losses. The United States Supreme Court relied on this principle to establish the open transaction doctrine in the seminal case Burnet versus Logan.
Andrews and Hitchcock Iron Company held stock in Mahoning Ore and Steel Company. Mahoning Ore mined large but varying quantities of iron ore in any given year. Under a shareholder’s agreement, Mahoning Ore distributed extracted ore among shareholders annually in proportion to their holdings.
Missus Logan owned 250 shares of Andrews, and her mother held eleven hundred shares.
In 1916, Youngstown Sheet and Tube Company acquired Andrews. In exchange for their shares, Youngstown agreed to pay shareholders 60 cents per ton of ore received from Mahoning Ore annually and attributable to their shares. In 1917, Logan’s mother died. She left half of her right to all future payments from Youngstown to Logan. For estate tax purposes, the bequest was valued at around $270,000. From 1917 to 1920, Youngstown paid Logan over $35,000. Logan also received over $30,000 from her mother’s bequest.
Logan didn’t include any payments from Youngstown on her federal income tax returns. As a result, the commissioner of the Internal Revenue Service, David Burnet, assessed a deficiency. The commissioner determined that the fair market value of Youngstown’s continuing obligation was ascertainable when Youngstown purchased Logan’s shares and that any profit was taxable income.
Logan argued that all money received was a recovery of capital. Logan claimed that until she received an amount equaling her adjusted basis in the shares, all receipts were a return of her investment and not taxable income. Logan also argued that until she received an amount equal to the appraised value of her mother’s bequest, all receipts were nontaxable.
The board of tax appeals affirmed. The court of appeals reversed. It held that it was impossible to ascertain the fair market value of Youngstown’s obligation in 1916. And Logan was entitled to a return of her capital and the value of her mother’s bequest before any receipts were taxable income. The United States Supreme Court granted cert.
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