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HELVERING V. BRUUN, 309 U. S. 461 (1940)
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U.S. Supreme Court

Helvering v. Bruun, 309 U.S. 461 (1940)
Helvering v. Bruun
No. 479
Argued February 28, 1940
Decided March 25, 1940
309 U.S. 461
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
Syllabus
1. Where, upon termination of a lease, the lessor repossessed the real estate and improvements, including a new
building erected by the lessee, an increase in value attributable to the new building was taxable under the Revenue
Act of 1932 as income of the lessor in the year of repossession. P. 309 U. S. 467. chanroblesvirtualawlibrary
Page 309 U. S. 462
2. Hewitt Realty Co. v. Commissioner, 76 F.2d 880, and decision of this Court dealing with the taxability vel non of
stock dividends, distinguished. P. 309 U. S. 468.
3. Even though the gain in question be regarded as inseparable from the capital, it is within the definition of gross
income in 22(a) of the Revenue Act of 1932, and, under the Sixteenth Amendment, may be taxed without
apportionment amongst the States. P. 309 U. S. 468.

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105 F.2d 442 reversed.

Certiorari, 308 U.S. 544, to review the affirmance of a decision of the Board of Tax Appeals overruling the
Commissioner's determination of a deficiency in income tax. chanroblesvirtualawlibrary
Page 309 U. S. 464
MR. JUSTICE ROBERTS delivered the opinion of the Court.
The controversy had its origin in the petitioner's assertion that the respondent realized taxable gain from the forfeiture
of a leasehold, the tenant having erected a new building upon the premises. The court below held that no income
had been realized. [Footnote 1] Inconsistency of the decisions on the subject led us to grant certiorari. 308 U.S. 544.
The Board of Tax Appeals made no independent findings. The cause was submitted upon a stipulation of facts. From
this it appears that, on July 1, 1915, the respondent, as owner, leased a lot of land and the building thereon for a term
of ninety-nine years.
The lease provided that the lessee might at any time, upon giving bond to secure rentals accruing in the two ensuing
years, remove or tear down any building on the land, provided that no building should be removed or torn down after
the lease became forfeited, or during the last three and one-half years of the term. The lessee was to surrender the
land, upon termination of the lease, with all buildings and improvements thereon.
In 1929, the tenant demolished and removed the existing building and constructed a new one which had a useful life
of not more than fifty years. July 1, 1933, the lease was cancelled for default in payment of rent and taxes, and the
respondent regained possession of the land and building.
The parties stipulated
"that as at said date, July 1, 1933, the building which had been erected upon said premises by the lessee had a fair
market value of $64,245.68, and that the unamortized cost of the old building, which was removed from the premises
in 1929 to make way for the new building, was $12,811.43, thus leaving a net fair market value as at July 1, 1933, of
$51,434.25, for
Page 309 U. S. 465
the aforesaid new building erected upon the premises by the lessee."
On the basis of these facts, the petitioner determined that, in 1933, the respondent realized a net gain of $51,434.25.
The Board overruled his determination, and the Circuit Court of Appeals affirmed the Board's decision.
The course of administrative practice and judicial decision in respect of the question presented has not been uniform.
In 1917, the Treasury ruled that the adjusted value of improvements installed upon leased premises is income to the
lessor upon the termination of the lease. [Footnote 2] The ruling was incorporated in two succeeding editions of the
Treasury Regulations. [Footnote 3] In 1919, the Circuit Court of Appeals for the Ninth Circuit held, in Miller v.
Gearin, 258 F.2d 5, that the regulation was invalid, as the gain, if taxable at all, must be taxed as of the year when

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the improvements were completed. [Footnote 4]

The regulations were accordingly amended to impose a tax upon the gain in the year of completion of the
improvements, measured by their anticipated value at the termination of the lease and discounted for the duration of
the lease. Subsequently, the regulations permitted the lessor to spread the depreciated value of the improvements
over the remaining life of the lease, reporting an aliquot part each year, with provision that, upon premature
termination, a tax should be imposed upon the excess of the then value of the improvements over the amount
theretofore returned. [Footnote 5]
In 1935, the Circuit Court of Appeals for the Second Circuit decided, in Hewitt Realty Co. v.
Commissioner, chanroblesvirtualawlibrary
Page 309 U. S. 466
76 F.2d 880, that a landlord received no taxable income in a year, during the term of the lease, in which his tenant
erected a building on the leased land. The court, while recognizing that the lessor need not receive money to be
taxable, based its decision that no taxable gain was realized in that case on the fact that the improvement was not
portable or detachable from the land, and, if removed, would be worthless except as bricks, iron, and mortar. It said,
76 F.2d 884:
"The question, as we view it, is whether the value received is embodied in something separately disposable, or
whether it is so merged in the land as to become financially a part of it, something which, though it increases its
value, has no value of its own when torn away."
This decision invalidated the regulations then in force. [Footnote 6]
In 1938, this court decided M.E. Blatt Co. v. United States, 305 U. S. 267. There, in connection with the execution of
a lease, landlord and tenant mutually agreed that each should make certain improvements to the demised premises
and that those made by the tenant should become and remain the property of the landlord. The Commissioner
valued the improvements as of the date they were made, allowed depreciation thereon to the termination of the
leasehold, divided the depreciated value by the number of years the lease had to run, and found the landlord taxable
for each year's aliquot portion thereof. His action was sustained by the Court of Claims. The judgment was reversed
on the ground that the added value could not be considered rental accruing over the period of the lease; that the
facts found by the Court of Claims did not support the conclusion of the Commissioner as to the value to be attributed
to the improvements chanroblesvirtualawlibrary
Page 309 U. S. 467
after a use throughout the term of the lease, and that, in the circumstances disclosed, any enhancement in the value
of the realty in the tax year was not income realized by the lessor within the Revenue Act.
The circumstances of the instant case differentiate it from the Blatt and Hewitt cases, but the petitioner's contention
that gain was realized when the respondent, through forfeiture of the lease, obtained untrammeled title, possession,
and control of the premises, with the added increment of value added by the new building, runs counter to the
decision in the Miller case and to the reasoning in the Hewitt case.

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The respondent insists that the realty -- a capital asset at the date of the execution of the lease -- remained such
throughout the term and after its expiration; that improvements affixed to the soil became part of the realty
indistinguishably blended in the capital asset; that such improvements cannot be separately valued or treated as
received in exchange for the improvements which were on the land at the date of the execution of the lease; that they
are therefore in the same category as improvements added by the respondent to his land, or accruals of value due to
extraneous and adventitious circumstances. Such added value, it is argued, can be considered capital gain only
upon the owner's disposition of the asset. The position is that the economic gain consequent upon the enhanced
value of the recaptured asset is not gain derived from capital or realized within the meaning of the Sixteenth
Amendment, and may not therefore be taxed without apportionment.
We hold that the petitioner was right in assessing the gain as realized in 1933.
We might rest our decision upon the narrow issue presented by the terms of the stipulation. It does not appear what
kind of a building was erected by the tenant, or whether the building was readily removable from
the chanroblesvirtualawlibrary
Page 309 U. S. 468
land. It is not stated whether the difference in the value between the building removed and that erected in its place
accurately reflects an increase in the value of land and building considered as a single estate in land. On the facts
stipulated, without more, we should not be warranted in holding that the presumption of the correctness of the
Commissioner's determination has been overborne.
The respondent insists, however, that the stipulation was intended to assert that the sum of $51,434.25 was the
measure of the resulting enhancement in value of the real estate at the date of the cancellation of the lease. The
petitioner seems not to contest this view. Even upon this assumption, we think that gain in the amount named was
realized by the respondent in the year of repossession.
The respondent cannot successfully contend that the definition of gross income in Sec. 22(a) of the Revenue Act of
1932 [Footnote 7] is not broad enough to embrace the gain in question. That definition follows closely the Sixteenth
Amendment. Essentially the respondent's position is that the Amendment does not permit the taxation of such gain
without apportionment amongst the states. He relies upon what was said in Hewitt Realty Co. v. Commissioner,
supra, and upon expressions found in the decisions of this court dealing with the taxability of stock dividends to the
effect that gain derived from capital must be something of exchangeable value proceeding from property, severed
from the capital, however invested or employed, and received by the recipient for his separate use, benefit, and
disposal. [Footnote 8] He emphasizes the necessity that the gain be separate from the capital and separately
disposable. These expressions, however, chanroblesvirtualawlibrary
Page 309 U. S. 469
were used to clarify the distinction between an ordinary dividend and a stock dividend. They were meant to show
that, in the case of a stock dividend, the stockholder's interest in the corporate assets after receipt of the dividend
was the same as and inseverable from that which he owned before the dividend was declared. We think they are not
controlling here.
While it is true that economic gain is not always taxable as income, it is settled that the realization of gain need not
be in cash derived from the sale of an asset. Gain may occur as a result of exchange of property, payment of the

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taxpayer's indebtedness, relief from a liability, or other profit realized from the completion of a transaction. [Footnote
9] The fact that the gain is a portion of the value of property received by the taxpayer in the transaction does not
negative its realization.
Here, as a result of a business transaction, the respondent received back his land with a new building on it, which
added an ascertainable amount to its value. It is not necessary to recognition of taxable gain that he should be able
to sever the improvement begetting the gain from his original capital. If that were necessary, no income could arise
from the exchange of property, whereas such gain has always been recognized as realized taxable gain.
Judgment reversed.
THE CHIEF JUSTICE concurs in the result in view of the terms of the stipulation of facts.
MR. JUSTICE McREYNOLDS took no part in the decision of this case.

SYLLABUS
HELVERING V. BRUUN, 309 U. S. 461 (1940)
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Full Text of Case

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U.S. Supreme Court

Helvering v. Bruun, 309 U.S. 461 (1940)
Helvering v. Bruun
No. 479
Argued February 28, 1940
Decided March 25, 1940
309 U.S. 461
Syllabus
1. Where, upon termination of a lease, the lessor repossessed the real estate and improvements, including a new building erected by the lessee, an increase in value attributable to
the new building was taxable under the Revenue Act of 1932 as income of the lessor in the year of repossession. P. 309 U. S. 467.
Page 309 U. S. 462
2. Hewitt Realty Co. v. Commissioner, 76 F.2d 880, and decision of this Court dealing with the taxability vel non of stock dividends, distinguished. P. 309 U. S. 468.
3. Even though the gain in question be regarded as inseparable from the capital, it is within the definition of gross income in 22(a) of the Revenue Act of 1932, and, under the
Sixteenth Amendment, may be taxed without apportionment amongst the States. P. 309 U. S. 468.
105 F.2d 442 reversed.
Certiorari, 308 U.S. 544, to review the affirmance of a decision of the Board of Tax Appeals overruling the Commissioner's determination of a deficiency in income tax.
Page 309 U. S. 464

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EISNER V. MACOMBER, 252 U. S. 189 (1920)

Case Preview
U.S. Supreme Court
Eisner v. Macomber, 252 U.S. 189 (1920)
Eisner v. Macomber
No. 318
Argued April 16, 1919
Restored to docket for reargument May 19, 1919
Reargued October 17, 20, 1919
Decided March 8, 1920
252 U.S. 189
Syllabus
Congress was not empowered by the Sixteenth Amendment to tax, as income of the stockholder, without apportionment, a stock dividend made lawfully and in good faith against
profits accumulated by the corporation since March 1, 1913. P. 252 U. S. 201.Towne v. Eisner, 245 U. S. 418.
The Revenue Act of September 8, 1916, c. 463, 39 Stat. 756, plainly evinces the purpose of Congress to impose such taxes, and is to that extent in conflict with Art. I, 2, cl. 3, and
Art. I, 9, cl. 4, of the Constitution. Pp. 252 U. S. 199, 252 U. S. 217.
These provisions of the Constitution necessarily limit the extension, by construction, of the Sixteenth Amendment. P. 252 U. S. 205.
What is or is not "income" within the meaning of the Amendment must be determined in each case according to truth and substance, without regard to form. P. 252 U. S. 206.
Income may be defined as the gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital. P. 252 U. S. 207.
Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severed from
it, and derived or received by the taxpayer for his separate use, benefit, and disposal. Id.

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A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the corporation, takes nothing from the property of the corporation and adds nothing
to that of the shareholder; a tax on such dividends is a tax an capital increase, and not on income, and, to be valid under the Constitution, such taxes must be apportioned according
to population in the several states. P. 252 U. S. 208.
Affirmed.
Page 252 U. S. 190
The case is stated in the opinion.
Page 252 U. S. 199

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Farid-Es-Sultaneh v. Commissioner
|More
Citation. 160 F.2d 812, 1947 U.S. App. 3403, 47-1 U.S. Tax Cas. (CCH) P9218; 35 A.F.T.R. (P-H) 1049
Brief Fact Summary. Petitioner received stock as part of a marriage agreement. Kresge promised to marry and Petitioner promised to relinquish rights to any of his property.
Synopsis of Rule of Law. The basis of the item gifted is the basis in the hands of the donor and not the recipient.
Facts. Petitioner sold 12,000 shares of common stock of S.S. Kresge Company for $230,802.36. As part of an agreement with Sebastian S. Kresge, Petitioner received the right to
the stock in exchange for a promise to marry. Petitioner and Kresge were eventually divorced. The Commissioner of Internal Revenue sought to count Kresges basis for determining
the gains and not Petitioners basis on the day she obtained ownership because it was a gift.
Issue. Should the basis of the stock when acquired by Kresge apply or should the basis when Petitioner acquired it apply?
Held. Circuit Judge Chase issued the opinion for the United States Second Circuit Court of Appeals in reversing the Tax Court and holding that the stock exchange was not a gift and
thus, the basis at the time acquired by Petitioner should be used.
Dissent. Circuit Judge Clark issued a dissenting opinion that is omitted from the text.
Discussion. The Court of Appeals found that the stock was not a gift because it was taken in consideration of a promise to marry, and coupled with her promise to relinquish all
rights to his property.

Farid-es-Sultaneh v. Commissioner: Woman is given stock in exchange for prenup that says this is all she gets. Issue: is this a gift or a purchase/exchange? EXCHANGE. Why?
quid-pro-quo for the stock: release of marital rights (See Duberstein rule). AB is FMV at time of transfer/exchange.
REVIEW: What happens when property is acquired by gift?
Donor has no taxable consequences (1001 doesn't apply).
Donee has exclusion via 102 (no tax consequences)
If you apply GBR your basis would be FMV at the time you got it, BUT THIS IS A BIG PROBLEM, b/c there is a part there that isn't taxed.
Farid-Es-Sultaneh v. Commissioner
From Wikipedia, the free encyclopedia
This article may need to be wikified to meet Wikipedia's quality standards. Please help by adding relevant internal links, or by improving the article's layout. (April 2011)
Click [show] on right for more details.[show]
Farid-Es-Sultaneh v. Commissioner, 160 F.2d 812 (2d Cir. 1947)[1] is a United States federal income tax case. It is notable (and thus appears frequently in law school casebooks)
for the following holding:

Appreciated property, transferred to a wife pursuant to an antenuptual agreement, was not a gift, but was consideration for which she sold her inchoate marital rights.

This applies the general rule, that a taxpayer recognizes a gain on the transfer of appreciated property in satisfaction of a legal obligation.

Therefore, the property's basis in her hands was not a "carryover" (gift) basis from her husband. Instead, the court set its basis at its fair market value.

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[edit]Facts
The taxpayer-wife sold stock which she had received from her husband, S. S. Kresge, pursuant to an antenuptual agreement, under which she accepted the shares in
consideration for surrendering all marital property rights in her husband's estate. (When they married, she was 32 years old; he was 57 years old and worth approximately
$375,000,000 and owned real estate of the approximate value of $100,000,000.) The stock had a basis in the husband's hands of 15 cents a share, but a fair market value of
$10 a share when transferred to her.
The Commissioner contended that the taxpayer's basis in the shares was the same as her husband's--15 centsbecause the shares had been received by her as a "gift," as
used in Sec. 113(a) (2) of the Revenue Act of 1936. The taxpayer sued, arguing the transfer from husband to wife was not a gift for income tax purposes, but an exchange of
valuable property interestsstock for marital property rightssuch that her basis for the shares should be $10, their fair market value at the date transferred.
[edit]Issue
"The problem presented by this petition is to fix the cost basis to be used by the petitioner in determining the taxable gain on a sale she made in 1938 of shares of corporate
stock. She contends that it is the adjusted value of the shares at the date she acquired them because her acquisition was by purchase. The Commissioner's position is that she
must use the adjusted cost basis of her transferor because her acquisition was by gift."
[edit]Holding
There was sufficient consideration, underlying the taxpayer's receipt of the corporate stock pursuant to an antenuptial contract in exchange for relinquishing her inchoate
interest in her affianced husband's property, because this inchoate interest greatly exceeded the value of the stock transferred to her. Hence she did not acquire the stock by
gift, and need not take her husband's cost basis in determining her taxable gain on subsequent sale of the stock. Revenue Act 1938 113(a)(2), 26 U.S.C.Int.Rev.Acts, page
1048.
[edit]Academic Commentary
The Farid and Davis decisions are undoubtedly defensible in terms of the realization criterion: in general, transfers of property in satisfaction of contract obligations, fixed or
disputed, are taxable events, with the amount realized being measured by the value of the property transferred. But as against the larger Code policy embodied in the gift
exclusion--102 and its corollary, 1015the cases seem misguided, or at least doubtful, in result.[2]

If property transfers between spouses are "gifts" when they take place during marriage (with the result that the basis of the property in the transferor's hands carries over to
the transferee), it is difficult to see why transfers which are prompted by the formation of the marital unit should be treated differently.

And if transfers from deceased husbands to surviving widows are viewed as non-realization events even though the marital relationship thus comes to an end [under the
exemption for life insurance payouts], it is hard to see why a realization should be deemed to occur when the marriage is terminated through divorce.

The presence of a contract obligation, though it otherwise justifies a finding of taxable event, seems insufficient on the whole to remove pre-marital and (much more important)
post-marital property arrangements from the ambit of the gift provisions. Quite obviously, family wealth is being divided between husband and wife in both instances,
and it is this circumstancerather than the presence of "consideration" in Farid or of arm's length dealing in Davis--that ought to govern the tax outcome.

This logic explains why Congress in 1984 added 1041, which provides that a transfer of property between spouses, or between former spouses where the transfer is
incident to divorce, shall be treated as a "gift" for income tax purposes.

[edit]

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Farid-Es-Sultaneh v. Commissioner
United States Court of Appeals for the Second Circuit160 F.2d 812 (1947)
FACTS
In December 1923, S.S. Kresge transferred 700 shares of the S.S. Kresge Company to Farid-Es-Sultaneh (plaintiff). Kresge and Farid-Es-Sultaneh planned to wed after Kresge
obtained a divorce from his wife. The shares of stock, each with a fair market value of $315, were intended as financial protection for Farid-Es-Sultaneh in the event that Kresge
should pass away before their marriage took place. Kresge obtained his divorce on January 9, 1924, and transferred another 1,800 shares of stock to Farid-Es-Sultaneh on January
23, 1924. At the time, the stock was worth $330 per share. Before marrying in April 1924, Kresge and Farid-Es-Sultaneh signed an ante-nuptial agreement. The agreement
specified that in consideration of the shares received by Farid-Es-Sultaneh and Kresges agreement to marry her, Farid-Es-Sultaneh would relinquish all marital rights, including her
right to financial support as Kresges wife. The two were married until their divorce in 1928. In 1938, Farid-Es-Sultaneh sold 12,000 shares of the stock for $230,802.36. By that
time, the number of shares she owned had increased due to the payout of multiple stock dividends. It was calculated that if Farid-Es-Sultaneh purchased the stock, her adjusted
basis would be $10.66 2/3 per share, based on the fair market value of the shares at the time she received them. On the other hand, if the shares were a gift to Farid-Es-Sultaneh
rather than a purchase, she assumed Kresges adjusted basis of $0.159091 per share. Farid-Es-Sultaneh believed that she purchased the stock through her pre-nuptial agreement
with Kresge, and accordingly used the fair market value of the stock at the time she received them as her adjusted basis. The Commissioner (defendant) determined the stock was
a gift, and that Farid-Es-Sultaneh should have used Kresges adjusted basis in calculating taxable gain. The Tax Court agreed with the Commissioner.

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