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In order to determine whether there has been gain or loss, and the amount of the gain, if any, a court must withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration. Ordinarily, a taxpayer may not deduct from gross receipts a supposed loss, which in fact is represented by his outstanding note. And, conversely, a promise to pay indeterminate sums of money is not necessarily taxable income. Generally speaking, the income tax law is concerned only with realized losses, as with realized gains.
Respondent's mother had entered into a contract in which she sold her shares to a purchaser for cash and a fraction of the annual proceeds the purchaser thereafter made from ore extracted from the mine. From her mother's estate, respondent obtained the right to one-half of her mother's interest in the annual proceeds of the contract. Petitioner Commissioner of Internal Revenue assessed income tax deficiencies on the part of respondent. The trial court concluded that the income tax deficiencies with respect to proceeds respondent had received from the contract were proper, but the lower appellate court reversed. Certiorari was granted.
Should tax deficiencies be assessed with respect to proceeds respondent had received from the contract in question?
On certiorari review, the United States Supreme Court concluded that it was impossible to determine with certainty the market value of the agreement. Respondent had obtained the right to share in the indefinite proceeds of a contract. The Court explained that in order to determine gain or loss, and the amount of gain, if any, it had to withdraw from gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration. Respondent could not deduct from gross receipts a supposed loss represented by an outstanding note. Conversely, a promise to pay indeterminate sums of money was not necessarily taxable income.