## Facts

- Bruun leased land and an existing building to a tenant under a 99-year lease beginning July 1, 1915.
- The lease permitted the tenant to remove or tear down buildings (subject to specified limits) and required surrender of the premises at termination “with all buildings and improvements thereon.”
- In 1929, the tenant demolished the existing building and constructed a new building on the land.
- On July 1, 1933, the lease was cancelled for the tenant’s default in rent and taxes, and Bruun repossessed the land and the new building.
- The parties stipulated that as of July 1, 1933, the new building’s fair market value was $64,245.68 and the unamortized cost of the old building was $12,811.43, yielding a net gain figure of $51,434.25.
- The Commissioner determined Bruun realized taxable gain of $51,434.25 in 1933; the Board of Tax Appeals and the Eighth Circuit rejected that determination; the Supreme Court reversed.

## Issues

1. Whether, under § 22(a) of the Revenue Act of 1932, a lessor realizes taxable income in the year a lease terminates when the lessor repossesses property including improvements erected by the lessee.
2. Whether a measurable increase in property value is “realized” income for federal tax purposes absent a cash receipt, sale, or severance of the gain from the underlying property.

## Decision

- The Supreme Court held that upon lease termination and repossession, the lessor realized taxable income equal to the net value of the lessee-constructed building received.
- The Court concluded the gain was realized in 1933 because the lease forfeiture and repossession completed a transaction producing a measurable economic benefit.
- The Court rejected the argument that realization requires physical severance of gain from capital or a cash transaction.
- The Court ruled the gain fell within the broad definition of “gross income” in § 22(a) and could be taxed as “income” under the Sixteenth Amendment without apportionment.
- The Court reversed the Eighth Circuit and upheld the Commissioner’s determination.

## Legal Principles

- Gross income under § 22(a) includes gains derived from dealings in property and from the ownership, use, or interest in property, including noncash economic benefits.
- Realization does not require receipt of cash, a sale, or severance of gain from the underlying property; a completed transaction yielding a measurable economic gain can be taxable.
- When a lessor repossesses leased property improved by the lessee, the value of the improvements received at termination may constitute taxable income to the lessor in that year.
- Constitutional limits on “income” do not impose a universal severance requirement; a gain inseparable from capital may still be taxed as income when it is realized through a transaction.

## Conclusion

The Court held that a landlord who regains possession of leased property upon forfeiture realizes taxable income in the year of repossession equal to the net value of tenant-made improvements received, even though the gain is noncash and inseparable from the land.


Helvering v. Bruun, 309 U.S. 461 (1940)