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Burnet v. Sanford & Brooks Co. - 282 U.S. 359, 51 S. Ct. 150 (1931)


U.S. Const. amend XVI enables the government to raise revenue by taxation. It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment, and collection capable of practical operation. It is not suggested that there has ever been any general scheme for taxing income on any other basis. The computation of income annually as the net result of all transactions within the year was a familiar practice, and taxes upon income so arrived at were not unknown, before the Sixteenth Amendment.


In its income tax returns for 1913-16, respondent taxpayer Sanford & Brooks Co. (“Sanford”) included in gross income for each year payments received in that year under a dredging contract with the United States and deducted for each year expenditures made by Sanford during that year in performing the contract. The sum of the expenditures exceeded the sum of the payments received. The work was abandoned, and, in 1920, as the result of a suit on the contract for breach of warranty, Sanford received from the United States as compensatory damages an amount equal to such excess. It did not appear that Sanford ever filed returns on the accrual basis, or otherwise sought the benefit of the statutory provision in that regard or of Treasury regulations which, with respect to certain long-term contracts, allowed report of all receipts and expenditures on account of a particular contract in the year in which the work was completed, or report each year of the estimated profit corresponding to estimated expenditures of that year. Petitioner Commissioner of Internal Revenue (“Commissioner”), sought review oft the judgment that reversed an order of the Board of Tax Appeals sustaining against Sanford an income and profits taxes deficiency assessment for a certain tax year, pursuant to §§ 213(a), 230, 232, 233, and 234(a) of the Revenue Act of 1918 (Act), 40 Stat. 1057. 


Was taxpayer Sanford’s recovery for a breach of warranty in a contract suit against the United States includable as income for tax year it was received?




On certiorari, the Supreme Court of the United States reversed. The Court rejected respondent taxpayer Sanford’s contention that the recovery represented losses sustained in earlier years and was thus not includable as income in the year the payment was received. Rather, the Court ruled that under the provisions of the Revenue Act of 1918, and in light of the fact that Sanford did not make its tax returns on the accrual basis and did not use the methods afforded for long-term contracts, the payment received by Sanford was includable as gross income for the tax year it was received, regardless of whether the underlying transaction resulted in net profit for Sanford. Accordingly, the recovery made by Sanford in 1920 was gross income for that year. The money received was derived from a contract entered into in the course of Sanford's business operations for profit. Only by including these items of gross income in the 1920 return would it have been possible to ascertain Sanford's net income for the period covered by the return, which is what the statute taxes. 

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