## Facts

- Gillette Motor Transport, Inc. operated as a common carrier by motor vehicle.
- In August 1944, the company’s drivers struck and operations ceased.
- During World War II, the President directed the Office of Defense Transportation to take possession and assume control of Gillette’s transportation facilities; a federal manager took control on August 12, 1944 and ordered operations resumed.
- Title remained with Gillette; the government exercised possession and control until June 16, 1945, after which control ended.
- A federal claims body later determined the government had deprived Gillette of the right to decide how its facilities would be used and awarded compensation measured by fair rental value for the control period, plus interest, totaling $157,843.99 paid in 1952.
- Gillette reported the recovery as long-term capital gain under § 117(j) of the Internal Revenue Code of 1939; the Commissioner treated it as ordinary income and assessed a deficiency.

## Issues

1. Whether compensation for the government’s temporary possession and control of business facilities constitutes gain from an “involuntary conversion” of trade-or-business property under § 117(j) of the 1939 Code.
2. Whether an award measured by fair rental value for a temporary taking is taxable as ordinary income rather than capital gain.

## Decision

- The Supreme Court reversed the court of appeals and reinstated ordinary-income treatment.
- The Court held the payment was ordinary income, not capital gain under § 117(j).
- The Court reasoned that the government took only the temporary use of the facilities, not the facilities themselves, and the award functioned as rental-type compensation.

## Legal Principles

- Section 117(j) covers certain gains from the compulsory or involuntary conversion of qualifying trade-or-business property, generally requiring a disposition, destruction, or similar conversion of the capital asset itself.
- A temporary governmental taking of the use of property, followed by return of control, is not an “involuntary conversion” of the underlying capital asset within § 117(j).
- Compensation measured by the fair rental value for the period of governmental use is a substitute for rent or operating income and is taxable as ordinary income absent clear statutory direction otherwise.
- Capital-gain treatment under exceptions like § 117(j) is construed narrowly and does not extend to receipts that merely replace ordinary income streams.

## Conclusion

The Court held that compensation for the government’s temporary wartime possession and control of a carrier’s facilities—calculated as fair rental value—was ordinary income, because § 117(j) applies to conversions of the capital asset itself, not payments for temporary loss of use.


Commissioner v. Gillette Motor Transport, Inc., 364 U.S. 130 (1960)