## Facts

- Mrs. Logan owned 250 shares of Andrews & Hitchcock Iron Co., which held a 12% interest tied to iron ore produced under a long-term lease of the Mahoning mine.
- The lease imposed no minimum or maximum production requirements and no definite payment obligations; production varied substantially over time.
- In 1916, all Andrews & Hitchcock shareholders sold their shares to Youngstown Sheet & Tube Co. for (1) cash and (2) a promise to pay $0.60 per ton of ore annually apportioned to Youngstown by reason of the acquired interest.
- Mrs. Logan received $137,500 in cash from the sale and later received annual contract payments from 1917–1920.
- In 1917, Mrs. Logan also acquired by bequest a right to future contract payments; that interest was valued for federal estate tax purposes at $277,164.50.
- The Commissioner assessed deficiencies, asserting the per-ton payment right had a determinable fair market value at the time of sale, making the 1916 transaction closed and taxable.
- The Board of Tax Appeals sustained the Commissioner; the court of appeals reversed; the Supreme Court granted certiorari.

## Issues

1. Whether the 1916 sale, which included a contingent right to future tonnage-based payments, was a closed transaction requiring immediate gain recognition based on an ascertained fair market value of that right.
2. If the consideration could not be valued, whether the transaction remained open so that later receipts were treated as return of capital until the taxpayer recovered (a) March 1, 1913 value for pre-1913 property and (b) the estate-tax valuation for a bequeathed interest.

## Decision

- The Supreme Court affirmed the judgment for the taxpayer.
- The contingent promise to pay $0.60 per ton lacked an ascertainable fair market value at the time of the 1916 sale due to extreme uncertainty in future production and payments.
- The transaction was treated as open; amounts received under the contract were not taxable income until the taxpayer recovered her capital.
- For Mrs. Logan’s own shares, receipts were return of capital until they equaled the stock’s March 1, 1913 value.
- For the bequeathed interest, receipts were not income until they equaled the amount used to value the bequest for federal estate tax purposes.

## Legal Principles

- When consideration received in a sale is so contingent or speculative that its fair market value cannot be reasonably determined at the time of the exchange, the transaction may remain open for income tax purposes.
- In an open transaction, periodic receipts are applied first to recover the taxpayer’s capital investment (basis) before any amount is treated as taxable gain.
- Taxable profit is recognized when, and to the extent that, actual receipts exceed the amount required to restore the taxpayer’s capital; taxation should not rest on conjectural valuation of contingent rights.
- For property held before March 1, 1913, recovery of capital is measured by the property’s March 1, 1913 value; for a transferred right acquired by bequest, recovery is measured by the interest’s estate-tax valuation.

## Conclusion

The Court held that a sale including a highly uncertain, tonnage-based payment promise could not be forced into immediate gain recognition through an imputed present value; instead, the taxpayer could treat later receipts as return of capital until recovering the relevant basis (or estate-tax valuation), with taxable income arising only after that recovery.


Burnet v. Logan, 283 U.S. 404 (1931)