Burnet v. Sanford & Brooks Co.

Background

A Delaware corporation that had been doing dredging work under a government contract carried the contract’s receipts and expenses on its returns for 1913–1916. The work was abandoned, the company sued the United States in the Court of Claims, and in 1920 it received a recovery of $192,577.59 that included $176,271.88 of earlier contract expenditures and $16,305.71 of accrued interest. The company did not report those amounts as income for 1920. The Commissioner assessed a deficiency for 1920; a Court of Appeals decision excluded the $176,271.88 item but required the company to file amended earlier returns.

Reasoning

The Court addressed whether the recovery and interest had to be included in gross income for 1920 under the Revenue Act of 1918. It explained that the statute taxes annual net income computed from gross receipts less ordinary and necessary business expenses, and that gross income expressly includes business receipts and gains. The Court held the recovery derived from the company’s business contract was gross income when received, even though it matched expenditures made in earlier years. The opinion noted taxpayers could use accrual accounting or contract-reporting rules if they complied with the statutes and regulations, but the record showed this company did not do so. The Court therefore reversed the Court of Appeals and upheld the assessment.

Real world impact

The decision means businesses receiving contract recoveries must report them as income in the year received unless they clearly and timely use available accounting elections or follow contract-reporting rules. Relief from the timing effect of this result, the Court said, must come from Congress, not the courts.