Goodrich v. Edwards

Background

A taxpayer sued the collector of Internal Revenue to get back income taxes assessed in 1920 for the year 1916 that he paid under protest. Two stock transactions were at issue. In 1912 he bought 1,000 shares for $500, which were worth $695 on March 1, 1913, and sold in 1916 for $13,931.22. In a separate 1912 exchange he received stock then worth $291,600, which was worth $148,635.50 on March 1, 1913, and later sold in 1916 for $269,346.25. The collector taxed each sale based on the March 1, 1913 value as the basis for gain.

Reasoning

The Court examined whether the statute taxes only actual gains derived from sales. The Revenue Act includes gains from sales as taxable income and Section 2(c) fixes March 1, 1913 fair market value as the basis for property acquired earlier. Applying that rule, the Court agreed the first sale produced a real profit after the March 1, 1913 baseline and upheld that tax. For the second sale the Government conceded error: the taxpayer sold the stock for less than he originally paid, so he realized no overall gain from the investment and therefore no taxable income under the statute. The Court reversed that tax and sent the case back to the lower court for further proceedings consistent with this ruling.

Real world impact

The decision confirms that investors who actually realize a post‑1913 profit on sales may be taxed on that gain, but a sale that results in no net gain over the original purchase does not produce taxable income under the statute. The second tax assessment was overturned and the matter returned to the lower court for adjustment and possible refund.

Dissents or concurrances

Justices Holmes and Brandeis concurred only in the judgment because of earlier decisions of the Court.