Burnet v. Logan

Logan (plaintiff) sold 250 shares of a mining-related company to Youngstown Sheet & Tube for a lump sum plus an annual per-ton royalty on ore extracted under a long-term lease, an amount impossible to predict in advance since annual mining output was entirely at the mining company's discretion. Logan also inherited from her mother the right to half of similar future royalty payments, valued at a set amount for estate-tax purposes but likewise uncertain in actual future receipt. Through 1920, Logan's total receipts from both sources hadn't yet exceeded her cost basis in the shares or the appraised value of the bequest, so she reported none of it as taxable income, treating it all as return of capital. The Commissioner (defendant) instead valued the future royalty obligation as of 1916, treated the sale as a closed transaction with a determinable gain, and assessed deficiencies; the Board of Tax Appeals agreed, but the Court of Appeals reversed.