Burnet v. Houston

Background

In 1906 a director and investor in a Philadelphia real estate trust subscribed $305,000 to a guarantee fund to cover uncertain collateral called the 'Segal matters.' The trust later received bonds and stock tied to that collateral, and by 1912 those assets included 7,268 shares that represented much of the remaining value. In 1920 the trust liquidated the Segal matters and distributed one-quarter of those shares to subscribers; the investor received 222 shares worth $150 each, or $33,300, and claimed a $271,700 loss on his 1920 tax return. The Commissioner disallowed the deduction because the taxpayer did not show the property’s fair market value as of March 1, 1913, and the Board of Tax Appeals sustained that ruling; a federal appeals court had allowed the deduction.

Reasoning

The Court explained that the Revenue Act requires property acquired before March 1, 1913 to use the lower of cost or the fair market value on that date as the tax basis. The taxpayer therefore bore the burden to prove the 1913 value in order to claim a later loss. The Court rejected the appeals court’s view that proof was impossible and that cost and return alone could measure the loss. It said inability to prove a statutory fact is not a ground for allowance. The Court noted the trust had the stock by 1912 and that the taxpayer made no effort to obtain available evidence of 1913 value. For those reasons the Court reversed the judgment for the taxpayer.

Real world impact

Investors who bought property before March 1, 1913 must present evidence of that date’s fair market value to claim later losses. Failure to produce such evidence can bar a deduction, even if cost and later recovery are known. Taxpayers should seek all available historical records when claiming old-held losses.