North American Oil Consolidated v. Burnet
Headline: Court rules profits held by a receiver are taxed to the company when it becomes entitled and receives them, not to the receiver or to a later year, affecting companies in receiverships.
Holding: The $171,979.22 received in 1917 was taxable to the oil company as income of 1917, not taxable to the receiver in 1916 or as income in 1922.
- Clarifies when companies must report receivership profits for tax purposes.
- Limits receiver tax reporting to cases where the receiver controls the entire business.
- Taxes income when the company first becomes entitled to and receives the money.
Summary
Background
An oil company operated a section of oil land titled in the United States. The Government sued to oust the company and a receiver was appointed in February 1916 to operate that property and hold its net income. The receiver paid the 1916 profits to the company in 1917 after the District Court dismissed the Government’s suit and ended the receivership. The company had recorded those profits on its books and later filed an amended 1916 tax return in 1918 to include them.
Reasoning
The Court addressed who must report the profits for tax purposes and in which year. It held that a receiver does not report income for a corporation unless the receiver controls the corporation’s entire business, so these profits were not taxed to the receiver for 1916. The Court also found the company could not be taxed on the 1916 profits because it had no right in 1916 to demand payment and might never have received the money. The profits became the company’s income in 1917, when it first became entitled to and actually received the funds. The Court therefore affirmed the lower court holding that the amount was taxable to the company in 1917.
Real world impact
Companies involved in partial receiverships cannot be forced to report income that they had no right to receive. Receivership income is taxed to the party who first becomes entitled to and actually receives the money. This ruling leaves open ordinary tax relief if money must later be returned.
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