Brief for the Respondent — Helvering v. Bruun

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| Supe Gourt of the re 4.

chon | : Foe

ort -%

Guy T. HELVERING, COMMISSIONER OF. INTERNAL

REVENUE, dp gnte Serra

| CHARLES’ A a lanviiy, RESPONDENT.

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So OF thiggic

a | a he Se aah ie

7 THE UNITED STATES CIRCUIT COURT

FOR THE EIGHTH CIRCUIT. . eee om.

7 she THE en

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sae

‘

Sout ‘i. McEvens’- or

_ Reece A. GARDNER ;

yee Counsel for. orang cae >

> e é Postoffice address: wh Fro lee-

201 First National Bank Sees ‘

y, Kansas City, -Missouri. | : Q

“Wenaes. Srinsow, Mac & THoMson,: | :

Of Counsel. ue

ie Postoffice address: :

| 201 First National Bank Paling,

_ Kansas. City, Missouri. 3 3 t

eS)

_ Opinions below 3 : Rath? Scie eee eh.

Jurisdiction __.. | Ne ca scalninatesken Dekaiiice. ci

Question presented. mt Seibce : j 2

Constitutional Amendment and Statute Involved...

‘Statement of Facts. i

Summary of Argument.. Dassinisaees 4

I hl a ase esta sipoeitahiiodes

eros 3 ea ae ¥ bolinte =

: > CITATIONS - age eetyd ts

Cases: aay esas ae

Alexander Vv. Commissioner, 13 B.T.A. 116 ae % f

Blatt, M.E., Co. :v. United ‘States, 23 F.Supp. 461... 6

' “Blatt, M.E., Co. Vv. United States, 305 U. S. 267°.

6, EOE REPRESS SICAL SR _.2, 6, 12, 15, 16

* Bourn: v. McLaughlin (D.C. Cal.), 19. F.(2d) 148

ee ff eRe salle 9

‘Burnet v. Logan, 283 U.S. 404, 413-414. ae ©

a v. Gommissioner (C.C.A. 10), 71 F. (2d) 7

y) % :

Cleyeland: Trust Co. NV: Commissioner, 39 B.T. A.

113 - £6, 18 .

_, ,Climer v. Wallace, 28)Mo. 556- 559. oes wa, 10

. ‘Commissionet. v. Center Investment Co. (C. C.A.9),° -

_. 108 F.(2d) “190 “6, 12, 18

. Commissioner v. VanVorst (C.C.A. 9), 59 F. (2g) es

> 677, 6802... ee dD, 11

* ‘Commissioner Vv. Wood : (CCA. 7, 107 F. (24) 869

aaa 5,6, 9, 10, 12,17:

Cryan v. Warde (N-D. Cal), 263 Fed. 248__ 6, 12

Dominick v. United States (D.C. S.D. NY. ), 24

Xe. “% Vee, Seek, 6; 12, 15, 18

_ Durkheimer . Investment ‘Co. Vv. ‘Commissioner, 6

' B.T.A. 423 ~ a 6

Fisner Vv. Macomber, 952 U. Ss: 189, 207 - 4, 1, 21

- INDEX : See

: Senanciel Sona, v. ‘Commijeniones; 40 BIT.A. 614. 21

English v. Bitgood (D.C.’Conn. }, 21 F.Supp. 61 6, 12,15

_ Everhart v. Commissioner, 26 B.T.A. 318......5,12.

‘ .Geeseman v. Commissioner, 38 B.T:A. 258, 264. 5-6, 12.

. -Goodrich v: Edwards, 255-U. S. 527, 535° . os ze, 7; 10

Havens v. Fire Insurance .Co., 123 Mo. 403, 419 5, 10

Helvering v. Bruun (CA. 8), 105 F.(2d): 442 4 a i

Hewitt Realty Co, Vv. Commissioner (C.C.A. 2), 76

- F.(2d). 880 ! ee 5S 13; 14,15 _

Hilgenberg. v. United States ( D.C. Md.), 21 F.Supp."

453 —+—6, 12, 14

_Holtgreve v. ‘Sobolewski, 326 Mo. 413, 422... 5,10

Hughes. v. Kershow, 42 Colo. 210... tate __§, 10

Kentucky Block Coal Co. v; Lucas, 4 F.Supp. 266 6, 12

Koshland v. Helvering, 298 U. S. 441, 445-446 _5, 10, 20

Martin v. Commissioner, 24. B.T.A. 813 A Saat i ae

Merchants Loan. & Trust Co. Vv. Smietanka, 255’

| 509, 519-520... SEDI, 292 ERR i: Cae 4,7

"Miller « v. Gearin (C.C.A. 9),. 258 Fed. 225 ,- 6:12

Moaat Vv. "Commissioner (C.C.A.. 2), 48 F. (2d) 550, 5,9

552. - a)

__ Nicholas v. Fifteenth Street Investment Co. (CC. A.

10), 105. F7(2d) 442... : 6, 12,16

‘Omaha National Bank v. Csiesmabaaiemaee (C.C.A.:8),

75 F.(2d) 434, 436_. Ae | ae

O'Meara v. ‘Commissioner (CCA. 10), 34 F. (2d)

- 390, 395.

_ Palmer v. Commissioner, 305 U.-S. 63, 68-69..5, 11,21

.. Rose v. ‘Trust Co. (C. C’A. 5), 28 F. oxi 767, 776,

Ee ig 5,11

Rossheim v. - Commissioner (CCA. 3), 92 -F. (24)

> Se a ‘5, it

fer Salvage Vv: Commissioner (CCA, 2), 76 F (2a)

112, 114. 20-21 -

Schoenheit v. Lucas (CCA. 4), 44 F. (2d) 476, '

gg SPR EEE Paes ETE OR 5,9

Scott v. Commissioner, ‘9 B.T.A. 1219:, 18

Shelton, v. Jones, 66 Okla. 83... 3 5,10

;

eet

ee ee

= c

ye i Bee Cee ers | oe

oo ‘ !

i Slack v: Commissioner, 35 B.T.A.. 271, petition ‘tie

review dismissed (C.C.A. 9), 91 F.(2d) 1011 6, 18

. Staples, et al v. United States (D.C. ED.’ "Saas

F.Supp. 453 — 6 12,14

' Stimson Corp. v. Commissioner, 38 B.T.A. 303, 307 6.18 - )

Taft v. -Bowers, 278. U. S. 470, 482 . Kae es a

Taplin v. Commissioner (C.€.A. 6), 41 F.(2d) 454 5,11-

United States v.. Phellis, 257 U. S. 156, 168-169 . 4,'7,-D.

. United States v. Gays Car Meeting 4 & i. Co., 297

UL S. 88, 99... TT

~ Constitution: eet e amee Dora eras.

. Sixteenth Amendment. CK, FT

; Statutes: : ie ete Pe

_ Revenue Act of 1932, c. 209, 41 Stat:: ise:

| Miscellaneous:

. Treasury ‘Regulations WT; promulgated under the

Revenue Act. of 1932: ©.

‘Art. 63, ‘as amended by TD. 4539, XIV- 1 C.B.

| omen RL BAe RE Pas ako -2

HG Foe aah oe ions hea , Le igee Me

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_ ON WRIT OF CERTIORARI TO THE UnITED

| Supreme Court of | ‘the Runited States

“we

_ OCTOBER TERM, 1939 ”

No. 479

GUY T. HELVERING, COMMISSIONER OF INTERNAL

ie REVEN UE, PETITIONER, f

Go. (

CHARLES A. BRUUN, RESPONDENT. \.

OF APPEALS FOR THE. EIGHTH CIRCUIT. -

BRIEF FOR THE RESPONDENT

OPINIONS BELOW

The memorandum opinion of the Board of Tax Ap- 2

‘peals (R. 30) is unreported. The opinion of the Circuit

Court of Appeals (R. 43-46) is.reported at 105 F.(2d) 442.

¢* |. SUBISBICTION.

S CIRCUIT COURT

The judgment of the Circuit Court of Appeals was en-

tered July 24, 1939 (R: 47), and petition for writ of cer-.

(

tiorari was filed Octéber.-21, 1939, and was granted No-

vember 22, 1939. The jurisdiction of this Court is con-

ferred by Sectiorf 240(a)° of the Judicial Code as amended

by the Act of February 13, 1925.

"QUESTION PRESENTED

The question presented is whether a lessor derives

income in the: year of the cancellation of a lease to the

extent of the then value of a building erected by the lessee -

and forfeited to the lessor upon the termination oe the =

leage because of its breach.

CONSTITUTIONAL AMENDMENT AND STATUTE :

INVOLVED"

itis Amendment to the Ceniettintton:

_ The Congress ‘shall have power to lay and collect

taxes on incomes, from whatever source derived, with-

out apportionment among the several States, and with-

out regard to any census/’or enumeration.

Revenue Act of 1932, Chap. 209, 47 Stat. 169:

SEC. 22. GROSS INCOME ;

a: (a) “Gross income” includes gains, profits, _and-

«. income derived from salariés, wages, or compensation

for personal service, of whatever kind and in whatever

form paid, or from ‘professions, vocations, trades, busi-

nesses, commerce, of sales, or dealings in property,

_ whether real or personal.,- growing out of the owner-

‘ ship or use of or interest in such property; also a

interest, rent, dividends, securities, or the transactj

. of any business carried on for gain or profit, or alae

or profits and income derived from any source what-

Se ;

‘Article 63 of Treasury Regulations 77, promulgated under the

-Revenue Act ‘of 1932, as amended by T. D. 4539, XIV-1, C. B. 14

was held oe void by this Court in M. E. Blatt Co. v. United

305 U. S. i ‘

oe.

"STATEMENT OF FACTS

The hicks as stipulated (R. 13- 15) and found by the |

’ Board of Tax Appeals (R. 30) ‘are as follows:

_ .On July 1, 1915,. Charles A. Bruun, being then the

owner of. a parcel of improved real estate. located at the .

southeast corner .of Twelfth Street and Grand: Avenue,

Kansas City, Missouri, leased the same to Newntarket In-

. vestment Company for a period of 99 years (R. 14), ran-

ning from July 1, 1915, and ending June 30, 2014 (R.

16). The lease oer for the. ease" of rent as fol- .

lows:

_ $ 5,000.00 upon the execution of the lease

1,000.00 a month,to July 1, 1918

1,666. 66 4 month to July 1, 1922

2,083.33 a month to July 1, 1925 |

2,500.00 a month to July 1, 2014 (R. 17) .

The lease required the payment of all taxes by the

lessee (R. 18), and authorized the lessee’ to remove or.

tear down any buildings then, or which might thereafter

be placed, upon the .premises,. provided it shoyld*{irst de-

liver to the fessor a bond guaranteeing the Siient, of

‘ all rent and the performance of all the conditions of the

‘lease for a period of two years after the beginning of the

, removal or demolition of such building or buildings (R.

* 20-21). The lessee -was authorized, but not required,

to place new buildings upon the premises (R. 30, 25).

The lease provided for forfeiture for failure to pay rent or

taxes, and provided that no buildings should be removed

from the premises or torn down after forfeiture (R. 21-22, -

28), or after the year 2010 (R. 21). It provided that upon

termination of the lease. the lessee would “yield up to

the first party the lands hereby leased with all buildings,

improvements, fixtures and appliances situate thereon”

(R. 28).- The lessee wgnt into possession and during the

. . .

- . ° . ; a

i . ° ‘

. "

. /

7 4 L

_ latter part of 1929 tore down ae old ‘ellen which then

had a depreciated cost to the Respondent of $13, 365, and.

prior to December 31, 1929, it constructedta new building

upon the premises which had a. useful life of less than

50 yeafs. ‘

On July 1,. 1933, the lessee being in default ‘in the

payment of rent and taxes, the lease was cancelled and a

the Respondent went into possession of the property. The

building’ thereon, which had. been constructed by the

lessee, had a value at that date of $64;245.68. The unde--

preciated cost of the old building,torn down in 1929,

amortized to July - ‘1, 1933, was $12,811.43, which .sum,

when deducted from the $64, 245.68, left a balance of $51,-"

434.25 (R. 14). Neither this sum nor any part thereof |

was reported by the Respondent’ in.his income tax return

filed with thé Collector of Internal: Revenue at Kansas.

City, Missouri, for the yearg1933. Upon auditing “Re- .

spondent’s return, the Commissioner added $51,434.25 to:

Respondent’s gross income and determined a inoue A

of $4,111.43 (R. 15).

The Board of Tax Appeals held that no gain was”

realized from the’ cancellation of the lease in 1933 (R.

30) and the Circuit — of — affirmed (R. 46).

‘eee OF ARGUMENT

To derive from capital, income taxable under the sev-

eral Revenue -Acts enacted since the adoption of the Sixe

' teenth Amendment, it is essential that there be a growth

or increment of value in the property and that this be so.

severed frém the capital and received by the owner as to

make it available for his separate benefit and disposal.

- Eisner v. Macomber, 252 U. S. 189, 207; United States v.

- Phellis, 257 U. 8. 156, 168-169; Merchants Loan & Trust

"Co. v. Smietanka, 255 U.S. 509, 519-520; Taft v. Bowers,

278 U. S: 470, 482; United States v. Safety Car Heating ©

& L. Co., 297 U. S. 88, 99. Not only must such severed

)

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wer ae

AN ey

. . na

Qh he RRR RC RE MELN al Soy Shee

increment in value be reduced to possession, but it must

be in cash or in such form as to be readily reducible to

cash. Burnet v. Logan, 283 U. S. 404, 413-414; Commis-' ~ .

sioner v. Wood (C.C.A. 7), 107-F.(2d) 869; O’Meara Vv.

Commissioner (C.C.A. 10), 34-F.(2d) 390, 395; Champlin

v. Commissioner (C.C.A. 10), 71-F:(2d)-23,° 29; Schoen-

‘heit v. Lucas (C.C.A.°4), 44 F.(2d) 476, 479-480; Mount

v. Commissioner (C. C. A. 2), 48 F.(2d) 550, 552; Bourn

v. McLaughlin (D.C. Cal.), 19 F.(2d) 148, 150. Other-

wise, the owner would be required to pay a tax out of ©

capital and an ineome tax would be converted into a capi-

tal levy. This may not be done. Koshland v. Helvering, '

298 U. S. 441, 445-446: Gooner Vv. Edwards, 255 U. S. 527, -:

535. ° ;

J, Where a lessee constructs a building upon the prem-

ises of the lessor the huilding attaches to and becomes a

part of, the realty either at the time of its erection (Holt-

_greve v. Sobolewski, 326 Mo. 412, 422; see, Havens v. Fire

Insurance Co.,. 123 Mo, 403, 419; Climer v. Wallace, 28

Mo. 556-559), or, as, in the instant ‘case, simultaneously .

with the termination of the lease (Shelton v. Jones, 66 -

Okla. 83; ‘Hughes v. Kershow, 42 Colo. 210). Accord-.

ingly,,even though ‘the building’ increases the value of

the land, instead of that increase in value being severed

from the capital and made available for the taxpafar’s ‘*

separate use and disposal, it attaches to and, for the first

time, becomes a part of the capital. It is nothing more

than. an increment of valué in the property. It is

not unlike the result of a good bargain,.and it is well set- .

' tled that such a result does not constitute taxable income..

_ Palmer v. Gommissioner, 305 U. S. 63, 68-69; Rose v. Trust

Co. (C.C.A.°5), 28 F.(2d) 767, 776, 778; Commissioner v. {

VanVorst (C.C.A. 9),.59 F.(2d) 677, 680; Taplin v. Com-

missioner (C.C.A. 6,41 F:(2d) 454; Rosshetm v. Com- °

*, missioner (C.C.A: 3), 92 F. (2d) 247, 249; Omaha Na-

tional Bank v. Commissioner (C.C.A. 8), 75 F. (2d). 434,

436; Everhart v. Commissioner, 26 B.T:A. 318; Geeseman

» ® se i. : - sf

v. Commissioner, 38 B.T.A. 258, 264, acquiesced in by —

re the Commissioner, C. B. 1939-1, page 13... © .

os These e principles have been“accepted and applied ad-

-—versely to the Government’s contention by every pg

dealing with the question whether income accrues

— lessor by reason of the construction of a valuable build?

ing upon his property bythe lessee*(M. E. Blatt Co. v.-

United States, 305 U. S. 267; Commissioner v..Center In- .

— vestiment Co. (C.C.A. 9), 108 F.(2d) 190; Commissioner

= y. Wood (C.C.A. 7), 107/F.(2d) 869; Helvering v. Bruun

_ (C.C.A. 8), 105 F.(2d) 442; Nicholas vz Fifteenth Street -

Investment Ca .(C.C.A, 10), 105 -F.(2d) 289; Dominick

v. United States (D.C. S.D- N.Y,), 24 F.Supp. 829;

English vi Bitgood (D.C. Génn.), 21 F.Supp. 641; Staples.

et al v. United States E.D. Pa.), 21 F.Supp. 737;

Hilgenberg v. United States (D.C. Md.), 21 F.Supp. 453;

Hewitt Realty Co. v. Commissioner (C.C.A. 2), 76 F.(2d) |

880; Cryan v. Wardell (N.D. Cal.),.263 Fed. 248; Miller ~

v. Gearin (C.C.A. 9), 258 Fed. 225), with the exception .

of the Court of Claims in M. E: Blatt Co. v. United States,

_ 23 F.Supp. 461, and the District Court for the Western

District of Kentucky in Kentucky Block Coal Co. v. Lu-

cas, 4 F ‘Supp. 266, both of which were overruled by this

Court in M. E. Blatt Co. v. United States, sypra. ©

- The Board of Tax Appeals has: also consistently held -

that no iricome ‘results to a lessor. upon cancellation of a

“lease even though he comes into possession of a valuable

' building constructed sypon the premises by the lessee.

Scott v. Commissioner, 9 B.T.A. 1219; Alexander v. Comn-

missioner; 13 B.T.A. 1169; Martin v. Commissioner, 24

B.T.A. 813; Slack v. Commissioner, 35 B.T.A. 271, petition

for revie® dismissed (C.C.A. 9), 91 F.(2d) 1011; Durk-

. heimer Investment Co. v. Commissionér, ‘36 B.T.A. 423;

‘ F. S. Stimson Corp. v. Commissioner, 38 B.T.A. 303, 307;

» Cleveland sictaas Co. v. Commissioner, 39 B.T.A. 113. :

; ; cay

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SP Oe Rp Pen ee TD

‘Respondent Re Realized) No Taxable Inecipe upon Termination

ef the Lense |

The. Sixteenth Amendment - ‘to ‘hee Constitution au-"

* thorized’ Congress “to lay ‘and collect taxes on income —

‘from whatever source derinigats”. [Italics ours. ]

‘

tion 22(a) of the: Revenue Act of 1932, so far as

; | here ‘haterial, defines | the. term A ay incofne” as in-

cluding |

ne profits- -and income. dered aa oe.

dealings in property, whether real or personal, grow- — -

ing out.of the ownership or use of or-interest in’such

-" property; * * * or gains or ‘profits and income derived |

from any source whatever. [Italics ours:] .

In an unbroken line of decisions this Court has ern: ©

sistently held that ‘before income can be said to be * de-

rived from” gapital, it. is necessary not only that there

‘be a growth or increment of value in the property, but

there must be something. of exchangeable value. severed

trom. the. property and received by the taxpayer for his

separate use, benefit, and disposal.‘ Eisner v. Macomber,

252 U.S. 189, 207; United. States-v. Phellis, 257 U. S.

156, 168-169; Merchants Loan & Trust Co. v. Smietanka,

255 U. S. 509, 519-520; Taft v.-Bowers, 278 U. S. 470-482;

Goodrich v. Edwards, 255 U. S. 527, 535; United States -

‘vy. Safety Car Heating & i. Co., 297 U. ‘SS. 88, 99.

In. Eisner y. Macomber, supra; “this Court had before —

it. the question | whether a stock ‘dividend constituted in-

_ come which could be reached by an income tax statute,

and with respéct to the essential characteristics of a gain

-derived from property it said, pages 206-209: ' —

* * * For the present purpose we require only a.

clear definition of the term, “income” as used in com-

aa ee a”

3 D

mon speech, in ‘order to determi e its meaning i in the -—

Amendment; * * *

| After examining dictionaries ; in common use * * *

we find little to add to the succinct definition adopted

in two cases arising under the Corporation Tax Act of

. August 5, 1909 * * *: “Income may Ve defined as.

. the gain derived from capital, from labor, or from

both combined,” provided it be understood to include ~

profit gained through a sale or conversion of capital ©

assets, to which it was applied in the Doyle case * * *.

‘ Brief as it is, it indicates the characteristic and ?

distinguishing attribute df income, essential for a cor-

‘rect solution of the present controversy. The Gov-

ernmenpgalthough basing its argument upon ‘the def-

inition as quoted, placed chief emphasis upon the

word “gain’’, which was intended to include a variety -

of meanings; while -the significance of the next three —

words, was. either ’ overlooked’ or misconceived,--

‘“derived--from--capital” ;--“the gain--derived--from--

capital” etc. Here we have the essential matter: ~

Not a gain accruing to capital,. not a growth or incre-

ment of value inthe investment; but a gain, a profit,

mething of exchangeable value proceeding from the

“property, severed from the capital, however invested

or employed, and coming in, being “derived”, that is,

received or drawn by the recipient (the taxpayer )

for his. separate use, benefit, and* disposal; that is

‘income derived from property. ee) else answers

the description.

The same fundamental conception is clearly set

forth in the Sixteenth Amendment. -- “Incomes; from

whatever source derived”,--the essential thought be-

ing expressed with.a conciseness and lucidity entirely

.in harmony with the form ‘and style of the Con-

stitution.

Thus, it will bé seen that this Court has recognized

: the import of the phrase “derived from” as used both in

the constitutional amendment and in the statute, and.

eK held that before there can be a taxable income ‘“‘de-

riveqd from”.property there must be a, growth or incre-

ment of vadue isi the investment and it must be so severed

from the capital ‘as to make it available for the taxpayer's

ote)

—_

oo 2 eee

Liter a + sea

‘ separate use and eink ‘This definition of income was

reiterated in United States v. Phellis, supra, wherein this |

Court: had before it the question ‘whether ‘a certain cor-

porate distribution-constituted a taxable dividend with-

in the méaning of a-statute similar to Section 22( a), supra.; .

a regard thereto the Court said, page 169: |

7 Disregarding the ‘slight looseness of « con- -

struction,. we interpret “‘gains, profits, and income ©

derived from * * * dividends’, etc., as meaning not |

that everything in the form of a dividend. -must be.

treated as. income, but that income derived in the

way of dividends shall be taxed. Hence the inquiry

must be whether the shares of stock in the new com-

pany. received b§ claimant-as a dividend ‘by reason

of his ownership of stock in the old-company con-

stituted’ * * * a gain derived: :from capital, not a gain

accruing to capital, nor a growth. or increment: of

value in the investment, but a gain, a profit, some-- —

thing of exchangeable_.value ' proceeding from the |

property, severed from the capital, however invested,

and coming ‘in,--that is, received or drawn by the.

Thus, again we have this Court recognizing that be-

fore one can derive income from property. he must re-

ceive something which may be used and digposed of.sep- .

arate and apart from his capital. The definition of income

laid down in these two decisions has been consistently

followed, and, so far as we have ‘been .able to ascertain,

never departed from by* this Court.

Applying the rule laid down in- these decisions, it

has beep held that before there can be any taxable gain

a pes snceoth must be received and it must be in cash

or in. such form as to be readily reducible te cash. Burnet.

_ Vv. Logan, 283 U. S. 404, 413-414; Commissioner. v. Wood

(C.C.A. 7), 107 *"F. (2d): 869; O’Meara v.' Commissioner ©

(C.C.A. 10), 34 F.(2d) 390, 395; Champlin v. Commis-,

sioner (C:C.A. 10), 71 F.(2d) 23, 29; Schoenheit v. -Lucas

(C.C.A. 4), 44 F.(2d) .476, 479-480; Mount v. Commis-

46d gt Oe

Sigh Me the

| Ale : Sie

| a ae £m. ete

lin (D.C. Cal.), 19 F. (2d) 148, 150. The recipient must

haye acquired something apart from his ‘capital out of

~ which he can discharge the government exaction. Com-

missioner’ v. Wood (C.C.A.-7), 107 F.(2d) 869, 872.

Otherwise, an income tax statiit€ would be d@nyerted into

‘a capital levy, and it is well settled that ‘that ma¥ not |

. be done. Koshland V. Helvering, 298 U. S. 441, 445-446; -

- Goodrich v. Edwards, 255°U. S. 527; 535. ° Sa gi

With these fundamental ‘characteristics of income in.

mind it is pertinent that we turn to a consideration of

the nature of the gain, if any, accruing to the lessor upon

the forfeiture of a lease ‘where a valuable building has

- been placed upon the premises by thie lesseg,» It is well

of separate and apart from the land, as.any conveyance-

settled that in such a case the building ‘attaches to and

. becomes a part of the realty either ‘at. the time of its

erection (Holtgreve.v. Sobolewski,-326 Mo. 412, 422; see,

Havens .v. Fire Insurance *Co., 123 Mo. 403, 419; Climer

_v. Wallace, 28 Mo. 556,-559) or, as in thé instant case,

‘~" “simultaneously with the terminatign of the lease (Shel-

ton v. Jones, 66 Okla.. 83; Hughes v. Kershow, 42 Colo.

210). Accordingly, ia instances’ where ‘the building actu-

ally’ increases the value of the land, instead of such incre-

ment of value being sé severed from the capital as fo

make it available for the taxpayer’s separate use and dis-

posal, the result is exactly the converse. The building,

inst of being severed from the property, becomes a

part Of it, and where the improvement is in the form

of a store and office building, as manifestly was the situ-

ation here,’ it is a matter of common kriowledge that it

could not b@removed , from’ the premiSes éxcept by its

demolition. A building which is not movable from the

premises on which it.stands cotfld not be sold.or disposed

'*)

"This is ‘apparent from the fact that at the time the lease was

cancelled, it provided for a rental of $2,500 a month,”’or- $30,000 a

e Commi

R°

Agent at .§2, which appraised value was later reduced by

t e ee

year (R. 17) and the building was first appraised by the Revenue

er) to $64,245.68 (R. 10).

& ‘f + a o es gate

would, by necessary implication, carry with it the right

_to pefmit the building to remain upon the land, and stich

_ right would, of course, constitute an interest in the realty,

' 4 the- capital of the owner. | Accordingly, it follows that

instead of the increment of value to Respohdent’ s capital

having been‘severed from the capital, it became attached

- to and a part of it, and manifestly, it was neither severed

_ _ from such capital nor severable. Weing neither separated

nor severable, Respondent received nothing of exchange-

-able value in ,the form of cash,or its equivalent with:

which he could pay an income fax.® Respondent's, posi+

tion is no different than though he Had procured the con-

struction upon his premises of a building worth $64,245.68

~ . at a cost of $12,811.43 (R.. 14).4. He was. gt orp ad

‘richer by $51,434.25. However, that does not differ ffom .

the result of any. good bargain, and it is. a well settled

principle that the results of a good’ bargain do not con-

stitute taxable income. Palmer v. +: Commissioner, 302

_ U.S. 63, 68-69; Rose v. Trust Co. (C.C:A. 5), 28 F.(2d)

767, ‘776, 778;, Commissioner v. VanVorst (C.C.A. 9): 59°

F.(2d) 677, 686; Taplin v. Commissioner (C.C.A. 6), 41

.F.(2d) 454; Rossheim . v. Commissionen {C.C.&. 3),

: 92 F: (2d) 247, "249; Omaha National Bank v. ommepiesjoner

i ae y "While by" the- stipulation. it is agreed | that the building had o

. » fair market value of $64,245.68; it| was never ‘intended tnat thai

should mean any more than that $64,245.68 represented ‘that portion— ,

of the fair’ markct value of the building and-the land which was

properly allocable to the building. This is implicit in the Govern-°

ment’s petition for writ of. certiorari; wherein it states that the case

is of general importafice. Manifestly,. ‘if the Government had in-

} > tended to contend that this case“should be controlled by a technical

construction of an inadvertent phrase contained in the stipulation,

which is. clearly contrary te well known facts, it could not have

represented to this Court that the case’ was of general importance

because in other cases the facts would be made to appear, and ap-

pearing they would. be at once’ distinguishable from the instant .case.

. Hence, we-assume thatzthe»Government will agree that the stipula-

_. tion with respect-to value was intended to mean nothing more than

that $64,245.68 represented that part of the fair market. value of the

_land and building which was ; Lang allocable ta, the building.

/ . ‘Such agreements are very common in arriving at a basis for,

- depreciation. . -

‘The ‘lessee placed a new building upon the premises in replate-

ment of an’ old one Raving | a es eee ae cost of $12,811.43 (R. 14).

=~. TS

ew ere

- (C.C.A..8), 75 -F.(2d) 434, 436; Everhart v. Com-.

‘ missioner, 26: B.T.A. 318; Geeseman v. Commissioner, ‘38 .

B.T.A., 258, 264, ‘acquiesced in by ‘the Cémimissioner, c. &.

1939-1, page 13.

These principles have ‘been recognized ‘and applied

by every court before which there has arisen the genefal

question whether a lessor derives taxable income by rea-

‘son of the construction on his premises of valuable im-

‘provements by a lessee,® with the exception of the Court’ -

of Claims in M. E. Blatt Co. v. United States, 23 F.Supp. °

_ 461, and the District Court for the Western District of

“Kentucky in/Kentucky Block Coal.Co. v. Lucas, 4 F.Supp.

106, The decision in the latter case wa devoidvof any

analysis of the authorities. Both decisiorjs were rejected

by thi Court in M. E. Blatt Co. v. Untted States, 305

US, _ a “i

° ‘The first’ case to seeks a court’ ap

Miller_y. ‘Gearin (C.C.A.. 9), 258 Fed. (May 5, weds

Therein, a building was placed upon’ the Igased prem

iri 1907.and the lease was forfeited in 1916. The Con

_ missioner determined that income resultéd_ to the Lesher

upon the termination of the igase. The court held to the’

contrary, saying page 226:

The lessor acquired nothing, in 1916 save the soe

session of that which for’ many years had been her

own. . The possession So acq red was ‘not income.

Petition; for . writ of certiorari was denied, 250 U.'S. 667,

The question was next considered in Cryan. Vv.

‘Wardell (ND. Cal.), 263 Fed. 248 Pebrvary Zz 1920).

'™M. E. Blatt Co. v. United St 305 U. S. 267; Sesicaincohne

v. Osated Investment Co. (C.C.A. 9), 108 eadt 190; Com ner

v. Wood (C.C.A. 7), 107 F.(2d) 869; Hel vy. Bruun (C 8),

105 F.(2d) 442; Nicholas v. Fifteenth Street Investment Co. (C.C.A.

ue 825; Emalish ree © “474 Fu; wD. Ie - ise

p. v. onn u tap

sah United States (D.C. E.D. Pa), 21 F.Su p. 137; Hilgenberg

. United States (D.C. Md.), 21 F.Supp. 463; Co. /

wommissioner (C.C.A. 2), 76 F.(2d) 880; Cryan.v. Warde (N, . Cal.)

, 263 Fed. 248; Se ee ee 9), 258 Fed. 225.

ane ;

rs to have Boon "

e F ‘

. .

ore fees ia cs

In +that case the building was placed -upon the leasehold

in 1910. and the lease forfeited’ in 1916. ° ‘The court held

that whatever accretion in value. resulted | plaintiff

from the erection of the building in questio

accrued

~ and became vested in the taxpayer in 1910, and hence

that there was no gain Upon a termination of the lease.

In. Hewitt Realty Co. v. Commissioner (Cc. A. 2),

76 F.(2d) 880 (April-8, 1935)7 the question presented Was

whether the lessor derived income at the time ‘the build-

Pe.

@ :

ing was-placed upon his ‘land by the lessee. It was found

that at the time of the completion of the building it had

a fair market value of $559,842.32. However, in holding

tha¥?no income resulted to the lessor the majority opinion

considered and applied the fundamental pee fe which |

we have outlined above. It said, page 884:

- ae concede that in a situation like that. at

bar a lessor need not receive money: to be taxable;

if improvements to land be portable--déetachable ma- —

‘’ chinery for example, which‘ he can take off and sell

as separate chattels--he receives income either when ‘

the lease is made, or when the term ends; for preseprt. .

purposes we need not:say which: On the other hand,

if the lease requires the lessee to drain the land, or

set out. shade trees, or pave. it, or grade it, or build a

- golf course, or a race track on it, we can see no dif-

ference . between the: resulting Nnerease in its ‘value

and that arising from the.growth of the surrounding

neighborhood, orthé increase in value of a share of

stock. The question as ave view it is whether: the

- value: received is embodied in something separately

dispgsable, whether, it is so merged in the land

as to become financially a part of it, something which,

. though it incteases its value, has no value of its own

when torn away.

* * Therefore, in our judgment if a building

when removed be worthless, save as bricks, iron, and

mortar, it becomes income only when the land is sold,

and. then only in so far as it increases the “amount

realized” at that time--the minuend in the ‘equation _

of gain. This answers every fiscal necessity, far more»

ee Ree ae

- the term lasts, the, lessor gets nothing which bene-

directly and stinaty ‘than sinyagiher formuls.- While

fits him but the rent; when it ends, he gets land for °

which ‘he can get.a higher rent--that is, if the build: |

ing is ‘neither outworn, rior outmoded. On.all rents

--he must pay a tax. If he sells at any time, pending

‘the term or after*it énds, the building will increase

his gains; and his taxes in proportion. But a power

to sell is not the same as a sale. ‘[Italics outs. ]

‘In Hiigenberg v. United States (Dc. Md.), 21

F. Supp. 453 (November 27, 1937), the question presented

_ was the same as that before the court in Hewitt Realty

Co. v. Commisgioner. After reviewing the cases which

have been cited above and approving the. reasoning of

the majority opinion in the Hewitt Realty Company case,

‘the court said, page 458:

The theory underlying the present” attitude of

the Commissioner and all of the decisions of the

Beard of Tax Appeals appears to be founded on the’

misconception that, since the ue of the improve-

ments iS ‘not income. at the ti the lease is termi-

nated, it must of necessity be income when they are |

completed, This, of course, is a non sequitur, becaUse -

it need not be income at either o—_ **.*

‘In Staples, et al v. United: States (D.C. E.D. Pa.),

21 F.Supp. 737 (December 31, 1937), the question pre- -

sented was the’same as that presented in ‘each of the

two foregoing cases. After a careful review of the de-

cisions. of this Court _— income, the court: said, ~

page 740:

In the: light of this authoritative definition: I

- have reachéd the conclusion that the value of’a build-

ing erected by a tenant on his own initiative and

a without any obligation to do so, which by reason. of

its being annexed tc the freehold becomes the prop-

. ‘erty of the landlord, is not*incomie of the landlord

_ until the land is sold or otherwise disposed of. * * *

- ‘In the present case it seems clear to me that the.

>. Value’ of the — ee added to the land

SSP. Manassas RIO kre |

Fr. ale aR

» 46 ¥' Be

by the. tenant was at the most, in the words of Mr.

Justice Pitney, but ‘a gain accruing ‘to capital a

a growth or increment of value in the investment.”

It was -not “something of exchangeable value, \pro-

‘ceeding from the property, severed from the capital,

* * * and coming in, being ‘derived,’ that is, re-

ceived or drawn by the recipient (the taxpayer) for

~ his separate use, benefit and disposal.”

In English” v. Bitgood (DC. -Conn.), 21 F.Supp. 641

(January 5, 1938), the question again was whether in-

“come accrued to,the landlord; at the time the building

was placed upon the premises. The court decided against

- the Government on the-basis of the decision of the court —

in Hewitt —s Company v. Commissioner, supra.

In Dominick v. United States (D.C. S.D. N.Y.), 24

F.Supp. 829 (January 30, 1938), the court had before it.

‘ the question here presented, that is, whether gain accrues ,

‘to the-lessor upon the termination of the léase. The

. court felt.that it was bound by the reasoning of the Cir-.

‘cuit Court of Appeals in the Hewitt Realty Company case

and, accordingly, found against the Government. ’

The question whether’ gain, resulted to the lessor at.”

the time of the construction of a building upon his prem-

ises by a lessee finally reached this.Court in M. E.-Blatt

Co. v. United States; 305 U. S. 267 (December 5, 1938),

’ and, in holding that no gain resulted: to the lessor at the

time the improvements became his, this Court said, page |

279: .

“Granting that the imnprovemesite increased the

value of the building, ‘that enhancement is not

realized income of lessor so far as , concerns

taxable income. The value of the“improyements is—

. not distgguishable from excess, if any there may’ be,

of value’ over cost of improvements made by lessor.

_ Each was an addition to’ capital; net income within”

the meaning of the statute. 6

p Thus, this Court in tinequivocal language wsiined

. the reasoning of the. courts rejecting the Government’s -

contention, and stated that even though improvements

placed .upon land by a lessee enhance the value of the

land such value is not distinguishable from excess of

value over cost. of improvements made by the owner;

_ each is an addition to: capital, and neither _ siege po

“able income within the meaning’ of the statute n-

guage more decisive of the issue here presented could not

well be employed. 3

Following the Blatt Pied degision, the question

whether income accrues to a lessor upon the cancellation

of the lease to thé’ extent of the value of improvements

made upon the premises by the lessee during his tenancy

eame before the Circuit Court of Appeals for the Tenth

‘Circuit in Nicholas v. Fifteenth Street Investment: Co.,

105, F.(2d) 289 (June 19, 1939). The court rejected the

Government’ s contention, saying, page 290:

The improvements for which the lessee paid en-

hanced the value of the property, but the enhance-

ment did not constitute realized income to the. tax-

payer during the years in question. It constituted

an addition to capital i ad of realized income with-—

in the meanin e statute. Such an enhance-

ment in valuf can result in realized income to the

_ taxpayer. only through increased rentals from the

property after. cancellation of the lease, or through

the sale of the property. * * *

This decision was followed by the decision of the Cir-

cuit Court of Appeals herein, in Helvering v. Bruun, 105

F.(2d) 442 (July 10, 1939). After reviewing the author-

ities the court refused to eet: the ne Ss

_ position, saying, page 4 444:

Under this rule the taxpayer in 1 the present case

is in the same position with respect to incgme that he-.

swould have been had he constructed a building upon

his premises in 1933 worth $51,434.25 in excess of

“~_¢ost. Such a building would have added “enhanced” _

or “‘excess” value to the real estate in that year; but

it would have been only “an addition to capital; not

income.’

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The same question reached the Circuit Court of Ap-

- peals for the Seventh Circuit in Commissioner v. Wood,

_ 107 F.(2d) 869 (Novernber 27, 1939), and in rejecting the

Commissioner’s contention, the court said; pages 871-872:

Commissioner’s position--that acquisition or pos- ,

' session by the lessor of leasehold improvements made

by the lessee and worth $80,000 results in the reali-

_ zation of income--is plausible, but we are.not ready

‘to indorse it. To us leasehold improvements may .°

constitute taxable income to the lessor, within the

meaning of the taxing statute, only if in a form more

definite than a mere acquisition of -title or posses-

sion, or an increase in value of the property to which ©

they are affixed. That is to say, in our minds lease-

hold improvements can result in taxable income to

the lessor only through :increased rentals from the

property after cancellation of the lease, or, —

. the sale of the property. * * *

__ Ifa taxpayer had constructed a building on his

land in 1932 worth $80,000 in excess of cost, he would

not have been chargeable with taxable income, al- —

though such an improvement would have increased -

the value of his land. We believe that the taxpayer

in the instant case is in no different situation and

consequently that he should be treated in the same

.*way. Moreover, what has the lessor. in the instant

“case received, from which he can pay the tax on

‘$80,000? Since his income is in the form of a capi-

tal asset, he has received ne with which to pay

the tax.

In. such cases, common. sense dicta that the

taxpayer by necessity must wait for his me until

_ there is a conversion into cash or its substantial equiv-

alent. See Eisner v. Macomber, 252 U. S.-189, 207,

208, *.* * Nor does such a-construction of the taxing

_ statute work a disadvantage to the Government. The.

Government will collect its tax, if the taxpayer sells

or exchanges the property. On’ the other hand, if

the taxpayer elects to hold the: property upon re-

possession, the Government will tax the entire earn- .

ings therefrom, as long as the building is valuable

enough to produce net income. [Italics ours.) .-

m .

In Commissioner v. Center Investment Company, 108

F.(2d) 190 (November 27, 1939), the Circuit Cott of

Appeals ‘for the Ninth Circuit reaffirmed its decision in

Miller v. -Gearin, supra, saying, page. 191:

We are of the view that no such change in kind

or extent of. the taxpayer’s rights was occasipned by

the forfeiture as to constitute a “severance” or “reali-

zation” of income. * * * —

* * * Any increase in value accruing to that as-

set in-the year of forfeiture of the lease constituted

increase in ecohomic worth but not —-

income. *:* *

The Board of Tax Appeals has likewise : wien consist-.

ent in holding that no gain accrues to a lessor upon the

termination of a lease, even though the lessee has con-

_structed a valuable building thereon.® °

Cleveland Trust Co. v. Commissioner, 39 B.T.A. 113,

_ was decided after the decision of this Court ‘was handed ; o |

down in the Blatt Company case. The Board reaftirmed

-its position, saying:

* * * However; in the Blatt case, supra, the Su-

_. preme Court considered the validity of that regula-

tion. It is true the Court there had to decide -only

“whether, under the lease here involved, one-tenth.

of what the commissioner and taxpayer call and agree

to be ‘estimated depreciated value,’ as of the end _

of the term, was income to petitioner in the first year

of the terr®”’ But; in disposing of that question on

the facts there before the Court, the majority opinion

clearly invalidates the regulation under which the

respondent acted here, and says:

“Granting that the improvements ‘increased the

value of the building, the enhancement is: not real-

ized income of —— So far as concerns. taxable in-

0” tees 6 iin 6 1219; Alexander v. Commis-

sioner, 13 BTA. 1169; Martin v. Commissioner, 24 BTA. B13: Slack

.v. Commissioner, 35 BT.A. 271, petition for review dismissed (C.C.A.

9), 91 F.(2d) 1011; Durkheimer Investment Co. v. Commissioner, 36

B.T.A. 423; F. S. Stimson Corp. v v. Commissioner, 38 B.T.A. 303, 307; :

Cleveland Trust Co. v. Commissioner, 39 B.T.A. 113.

ee ae ee ee Ne eee ee ee ae a

r, , : 49

come, the value of the improve ents is not distin-

guishable from excess, if any thére may be, of value

over cost of improvements made by lessor. Each was

-an addition to capital; not income within the meaning

of the statute. Treasury Regulations can add noth-

ing to income as defined by Congress.” .

In view of that unequivocal expression by the

Supreme Court, we now hold ‘that where, as here,

the improvements to the leasehold do not constitute

.rent and, when ‘constructed, became a part of the -

leased premises, and if remé@ved, had only a salvage

¥alue, no taxable income ‘is realized by their lessor’

upon its acquisition of possession of such premises .

at the termination of the lease.

' Thus, we have an.unbroken line of decisions of this

Court holding that before income can be said. to be de- ~

_ rived from capital it-is necessary not only that there be

a growth or increment of value in the property, but there

must be something of exchangeable value severed from

the property and received by, the taxpayer f is separate .

use, benefit, and disposal, and, with the two exeeptions -

noted above, we also have an unbroken line of decisions

of the courts running from ;May 5, 1919, down’ to the

_ present date, applying that definition of income to the

question whether taxable income accrues to a lessor by

reason of valuable improvements being placed upon his .

‘land by a lessée, and in, each instance reaching a negative-

conclusion. The Board of Tax Appeals. has also been

consistent in its holding that no income results to a lessor

under facts such as those here presented. We respect-

fully submit that those decisions are sound.

It is difficult to understand how ‘his Court can reach

a different conclusion without radically changing the def- —

inition of income as that term is ‘used in the Sixteenth |

‘Amendment to the Constitution, and in all of the Rev-

enue Acts adopted-since that time and as it has come to

be well understood in the general administration of the

income tax statutes. If the Government should prevail

in. procuring thé decision it seeks,: ‘instead of enyme

‘ 20

the income tax laws it will throw the entire strueture

of the statutes into confusion and give rise to new and

endless litigation. :

Petitioner contends that the tax is: valid, even ‘teainghn

that which is sought to be taxed does not constitute in- Zé

come. within the meaning of that term as used in the ~

_ Sixteenth Amendment .to the Constitution (Br. 23-25).

He says:

coe Howevét, it seems clear that a tax upon

such gain is valid wholly apart from the Sixteenth

_ Amendment since it is n *a direct tax. And-in any

event the tax is valid since the Sixteenth Amend-

ment was intended “to get rid of hice questions as.

to what might be direct taxes” ee

The manifest fallacy of this eiiniiain’ is, first, that

in the enactment of all of the income tax laws since 1913,

Congress has very obviously intended to exercise only

the powers gfanted to it by the Sixteenth Amendment;

second, the several cases of this Court referred to above

_ had to de with a definition of income uhder statutes

‘ practically-identical to Section 22(a) of the Revenue Act

of 1932; and third, the tax is what it purports to be, an

income tax, and, as we have stated above, such a tax

cannot be converted into a capital levy (Koshland v.

Helvering, 298 U. S. 441, 445-446) or some other form of

tax other than that which Congress intended it to be. ~

Manifestly, we are not concerned with that which Con- .

gress might have done. Our’concern is with that which —

Congress did.

Petitioner also contends (Br. 14-15):

* * * Indeed, even the purchase of property at .

a price substantially less than its fair market value

"may, under certain circumstances, be treated.as an in-

‘come producing transaction.

The difficulty with this contention is; ; first, that it is

snot supported by the authorities cited. Salvage v. Com-

SC er AT

ee Vint e eee

Wot ek RI bo. ne is

21 |

missioner (C.C.A. 2), 16°F. (24) 112, 114, méfely_ holds

. that under the particular facts of that case the difference

- between the fair market value of the stock received and .

the $150,000 paid therefor.constituted consideration to the

purchaser “for his covenant not to compete’. Mani-

festly, any money or its equivalent in cash paid to a person

“for his covenant nat to compete” with another; would

constitute income. That is a far cry from “the purchase

of property at a price substantially less-than its fair mar- —

ket. value”. In the case of Elverson Corp. v. Com-

missioner, 40 B.T.A. 614, the Board held that the tax-

payer had exchanged certain notes for shares of stock

“enhanced in value by the morning and Sunday editions -

. of the Public Ledger”, and that gain resulted to the tax-

payer measured the difference between the cost of the

notes and the cash equivalent of the property it received

in exchange. The situation was no different in. that case

than in any case where there is an exchange of property

for other property having a value readily convertible into

cash. -

The. second and fatal difficulty with, Petitioner’ s con-

& tention is that it has been flatty rejected by this and

other courts. Palmer v. Comm®sioner, 302 U. S. 63, 68-

69, and see other cases cited at page 13, supra.

The Petitioner cites (Br. 14) numerous cases hold-

ing that income may be received in the form of property.

However, an examination of those ‘cases will disclose that

in each instance the taxpayer received property which °

was separately disposable and readily convertible into —

cash. They have no bearing upon the issue here pre- _. -

sented. ;

Conclusion |

The Petitioner.has failed to cite any case which has

not been either overruled or rejected, which supports the —

sought departure from the principles Iaid down and fol-

_— by this Court ever since Eisner v. Macomber, —

22 oan

On the other hand, we have shown that this Court has

* consistently followed-that decision and held that in or-

der to derive taxable income from capital there must be,

first, an increment of value in the capital, and second,

such:a severance of that increment of value as to make it

subject to the separate use and disposal of the owner.

The taxpayer must have received something separate and

apart from his capital 6ut of which he can pay his tax.

‘We have shown that by a unanimity of opinion seldom

found in dealing with any supposedly. controversial ques-_

tion, both the courts and the Board of Tax Appeals have —

applied these general principles to facts similar to those

here presented, and have held that no taxable gain re-

sults to the lessor. Those decisions are consonant with

_ principles weighed in the test of time accepted by Con-

_ gress and by common judgment approved. Their over-

throw would result in endless confusion.. The decision

.below invalidating the tax. should be affirmed.

Respectfully submitied, 7

Joun H. McEvers

Reece A. GARDNER

‘Counsel for. Respondent

Postoffice address:

201 First National Bank Building,

Kansas City, Missouri. ang

- Ryianp, Stinson, Mac & THOMSON,

Of Counsel. -

.Postoffice address:

_201-First National Bank’ Building,

Kansas City, Missouri.

EE EEE ee ee

SUPREME COURT OF. THE UNITED STATES.

No. 479. —Ocroper Tena, 1939. - As

; Guy T. elven: Commissioner of In-) On Writ of Certiorari to

; vs. - ‘Court of Appeals for the

° ; Charles A. Bruun, Eighth Circuit.

[March 25, 1940)

Mr. Justice Roverts delivered the opinion of the Court.

The controversy had its origin in the petitioner’s assertion that

- the respondent realized taxable gain from the forfeiture of a lease-

:, hold, the tenant having erected a new building upon the premises.

The court below held that no income had been realized.’ Inconsis- . °

tency of the decisions on the subject.led us to grant certiorari.

The Board of Tax Appeals made no independent findings. The .

cause was submitted upon a stipulation of facts. From this it —

appears that on July 1, 1915, the respondent, as owner, leased a lot

of land and the building whenuen for a term of ninety-nine years.

‘The lease provided that the lessee might, at any time, upon giving

bond ‘to secure rentals accruing in the two ensuing years, remove,

or tear: down any building on the land, provided that no building

should be removed or torn down after the lease became forfeited, or

during the last three and one-half years of the term. The lessee

-was to surremder-the land,. upon termination of the lease, with all

' buildings and improvements thereon. -

In 1929 the tenant demolished and removed the catilien build-

ing and constructed a new one which had a useful life of not more

than fifty years, Juv 1, 1933, the lease was cancelled for default

in payment of rent and. taxes and the vespondent regained posses-

sion of the land and building. .

‘The parties stipulated ‘‘that as at said date, July 1, * 1933, the

building which had been erected upon said premises by the lessee

had a fair market value of $64,245.68 and that the unamortized cost

of the old building, whieh was removed from the premises in 1929

_ 1‘ Helvering v. Broun, 105 F. (2d) 442.

» =

- for the Ninth Cireuit held in Miller v. Gearin

2 Helvering vs. Bruun, - o ;

’ to make, way for the néw building was $12 git. 43, thus leaving a

net fair market value as at July 1, 1933, of $51,434.25, for the

aforesaid new building erected upon the premises by-the lessee.’’

On the basis of these facts, the petitioner determined that in,

1933 the respondent realized a net gain Of%$51,434.25. The Board

overruled his determination and the Cireuit Court of Appeats

affirmed the Board’s decision. ne

The course of administrative practic¢e and judicial. decision in

respect of the question presented has not been uniform. In 1917 the

Treasury ruled that the adjusted value of improvements installegl

upon Jeased premises is income ‘to the lessor upon the termination of

the lease. The ruling was incorporated in two succeeding editions

. of the Treasury Regulations.* In 1919 the Circuit Court of Appeals

oo 225, that the

regulation was-invalid as the gain, if taxable ‘at-all, must be taxed

‘as of the year when the improvéments were completed. . r

The regulations were accordingly amended to impose a tax upon

. their. anticipated value at the termination of the lease and dis-

counted for the durafton of the lease. Subsequently the regula-

tions flermitted the,lessor to spread the depreciated value of the im-

provements over the remaining life of the lease, reporting an aliquot

part each year, with provision that, upon premature termination, 4

, tax should be imposed upon the excess of the then value of the. im-

" proy ements over the amount theretofore returned.

In 1935 the Cireuit Court of Appeals for the Second Cireuit-de-_

eided in Hewitt. Redlty Co. v. ‘Commissioner, 76 F. (2d)°880, that 4

landlord received 1% taxable income in a year, during the term of

the lease, in which his tenant erected a building on the leased land.

The court, while recognizing that the lessor need not receive money

_ to be taxable, based its decision that no taxable gain was realized

in that case on the fact that the improvement was not portable or

‘ detachable from the land, and if removed would be worthless except: nee

as bricks. iron, and mortar. It said (p. 884) : ‘*The question 9 as we 7

air ee 2442, 19 Treas. Dee. Int. Rev. 25.

3 Regulations 33 (1918 Fd.) Art, 4. 50; Regulations 45 - 1919 Ed.)

Art. 48» :

4 This court denied certiorari, 250 U. S. 667.

5T. D. 3062, 3 Cum. Bull. 109; Regulations’45.(1920 Ed.), Art. 48; Regu-

lations 62, 65, , and 69, Art. 48; Regulations 86, 94, and 101, Art. _ 3

ao \

Helvering vs. Bruwn. ee eis ae

view, it is whether the value ‘recéived is embodied i in something, sep-

arately disposable, or whether itis so merged. in the land ds to be-

come financially a part of it, something which, though it. increases

its value, has no value of its own when torn away.”’-

This. decision invalidated the regulations then in force?

In 1938 this court decided Mf. Blatt Co-v/tmited States, 305

U.S. 267. There, in connection with the execution of a lease, land-

lord and tenant mutually agreed that each should make certain

. improvements to the demised premises and that those made by the

tenant should become and remain the property of the landlord.

The Commissioner valued the improvements. as of" tlie Aate they. °

were made, alowed depreciation thereon to the termination of. the .

- leasehold, divided the depreciated value bythe’number of years.

the lease had to run, and foufid the landlord taxable for each

. year’s aliquot portion thereof. His action was sustained by the .

Court of Claims. The judgment was reversed on the ground that

the added. value could not be considered rerital accruing over the

period ‘of the-lease; that the facts found by the Court of Claims

did not support, the conclusion of the Commissioner as to the value

to be attributed to the improvements after a use throuvhout the

term of the lease; and‘that, in the circumstances disclosed, any

enhancenfent in the value of the realty in the tax, year was not

income realized by the lessor within the Revenue Act. .

The circumstances of the instant case differentiate it from the

Blatt. and: Hewitt eases; but the petitioner’s contention that gain

was realized when the respondent, throngh forfeiture of the

lense, *obtained untrammeled title, possession arid control of the

premises, with the added’ increment of value ‘added. by the new

® building, runs counter to the decision: in the Miller case and to

«the reasoning in the Hewitt’ case. ‘

% . The respondent insists that the realty es capital’ asset at the

date of the execution of the lease, — remained such throughout

the term and after its expiration; that impyevements affixed

to the soil became part of the realty indistinguishably blended.

in the capital asset; that such improvements cannot be separately

valned or treated as received -in exchange for the improvements °

ee)

\ 6 The Hewitt case was followed in Hilgenberg rv. United States, 21 F. Su

\ \ Staples v. United States, 21 F. _ Supp. 737, and English v. Bitgood, 21

upp. ‘641.

e 5 |

°¢

or taselver rong vs. Bruun,

‘hich were.on the land at. the date. of the execution of the le

hat they are, therefore,, in the same category as cota

added by the respondent to his land, or accruals of value due to

extraneous and adventitious’ eircumstances. Such added, value,

, it is argued, can be considered capital. gain. only upon the owner’s

disposition of the asset. . The positfon is that the economic gain

consequent ‘upon the enhanced value of the recaptured asset Ys

not gain derived from. capital or realized withinythe meaning of

the Sixteenth Amendment and may not, “hetefor be, taxed with-

out apportionment.

‘We hold that the petitioner was —: in assewing the gairi. as

realized in 1933. | °

We might rest our decision ‘upon the narrow issue presented by

5 the terms of the stipulation. ‘It does not appear what kind of a

building was erected by thé’ ténant or whether the building was

readily removable from ‘the land: It is not stated whether the

difference in the value between the building removed and that

erected in its place accurately reflects an increase in the value of

'- land and building considered as a single estate in land. On the

facts stipulated, without more, we'should not be warranted y™ hold-

ing that the presumption of the correctness of the Commissioner’ s

determination has been overborne. ‘

- The respondent lifts, however, that the stipulation was in- ,

tended to assert that the sum of $51, 434.25 was the measure. of the

resulting ne La in-value of the real estate at the date of the

eancellation’ of the | * The petitioner seems not to’ contest this

view. Even ‘upon thine oa. we think that gain in thé amount

named was realized by theerespondent in the year of repossession.

The respondent can not successfully contend that the definition

_ of gross income in See, 2 22(a) of the Revenue Act of 1932’ is ‘not

‘ broad enough to cubeaias the gain in question. ‘That definition

follows closely the Sixteenth Amendment. Essentially ‘the re-

spondent’s position is that the Amendment does not permit —

ihe ‘taxation of such gain without apportionment amongst the

states. He relies upon what was said in Hewitt Realty Co. v. Com-

‘ missioner, sujird, and pon expressions found in the decisions of

_thjs court dealing with the taxability of stock dividends to the

effect that gain derived from capital must be something of ex-

Te. 209, 47 Stat. 169, 178,

- ceived back his land with a few building on -it, which added an —

changeable value proceeding from property, severed from the

_ they are not controlling here. | .

While it is true that economic gain is not sisi Vadis as in-

the necessity that the fyain be separa

‘separately disposable. These expressions, ‘however, ‘were used to-

clarify the distinction between an ordinary dividend and a stock

‘ begetting the gain’ from. hi

_the- stipulation of facts.

Helvering vs. Bruun. ee ee

capital, however invested or employed, and received by the re-

cipiem for his separate use, benefit, and (dlisposal.* He emphasizes

dividend. They were meant to show that in the case of .a

stock dividend, the stockholder’s int est in ‘the corporate assets

after receipt of the dividend’ was the me as and inseverable from

that which he owned before the divi - was declared. ‘We think

come, it is settled that the realization of gain need not be in cash de-

rived from the sale of an “a ain may occur as a result of’ ex-

change of property, payment’ of the taxpayer’s indebtedness, relief

from a liability, or other profit, realized from the completion of a

transaction.? The fact at ¢he/gain is a portion of the value of

property received by the tax yer in the transaction does not

negative its realization. * .

Here, as a result of a business : transaction, the respondent r re-

ascertainable amount to its value. It is not necessary to recognition

of taxable gain that he shonld be able to sever the improvement

original capital. If that were neces-

sary. no Income could

gain. .

Judgment réversed.

‘ , bad

The Crier Justice coneurs in the result i in view of the — of

“ior

. Vr. Justice WoRernotse took no part in the.decision of this case.

Micaela

Ses Bienes 0. Macomber, 252 U. 82489; 207; United States v. Phellis, 257

U. §. 156, 169.

9 Cullinan’ r. Walker, 262 T. 8. 134; Marr v. United States, 268 U. 8. 526;

, OM Colony Trust Co. vr. Commissioner, 279 U. 8. 716; United States v. Kitby

Lumber Co. 284 TT. 8. 1; Helvering +. Ameriean Chicle Co., 291 U. 8. 426;

T’r ited Rtates v. Hendler, eed U. 8. 564. ‘

from the capital and <

ise from the exchange’ of property; —

whereas sneh. vain Nas always been recognized as realized taxable

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.