Burnet v. Logan

Background

Mrs. Logan owned 250 of 4,000 shares in a company that held 12% of a mining company’s stock and the right to a share of ore taken from a long-term mine lease. In 1916 the shareholders sold the company to a larger steel firm. The buyer paid $2,200,000 in cash and promised yearly payments of 60 cents per ton of ore apportioned to the buyer. Mrs. Logan got $137,600 cash in 1916 and smaller annual payments in later years totaling $35,589.80 before 1921. She also received inherited interests from her mother that had been valued for estate tax purposes at $277,164.50.

Reasoning

The key question was whether the promised future ore payments had an ascertainable market value in 1916 so the sale could be treated as a finished, taxable event. The tax commissioner treated the promise as worth about $1,942,111 and taxed the sale; the Board and appeals court disagreed. The Court agreed with the appeals court and held the future payments were purely contingent and had no definite market value then. Because receipts were uncertain, the Court said Mrs. Logan must first recover her original capital before any remaining receipts are taxed as profit.

Real world impact

The ruling means sellers who accept speculative, conditional future payments need not treat those promises as immediate taxable income. Tax officials should wait until actual payments are received and then apportion them as return of capital first, then as profit. The decision affirmed the lower court’s judgment.