Helvering v. Bruun, 309 U.S. 461 (1940), was an income tax case before the Supreme Court of the United States. It is notable (and thus appears frequently in law school casebooks) for holding that under section 22(a) of the Revenue Act of 1932, income need not be in the form of cash for it to be taxable. Gain may occur as a result of exchange of property, payment of the taxpayer's indebtedness, relief from a liability, or other profit realized from the completion of a transaction.[1]
A landlord repossessed land from a tenant who had defaulted in the eighteenth year of a 99-year lease. During the course of the lease, the tenant had torn down an old building (in which the landlord's adjusted basis was now $12,811.43) and had built a new one (whose value was now $64,245.68). The lease had specified that the landlord was not required to compensate the tenant for these improvements.
The government argued that upon repossession, the landlord realized a gain of $51,434.25. The landlord argued that there was no realization of the property because no transaction had occurred, and because the improvement of the property that created the gain was not "severable" from the landlord's original capital.
Holdingedit
The court held for the government: under the Revenue Act of 1932, the value of the improvements was realized by the taxpayer as income in the year in which the forfeiture occurred.
The improvements, the Court observed, were received by the taxpayer "as a result of a business transaction," namely, the leasing of the taxpayer's land. It was not necessary to the recognition of gain that the improvements be severable from the land. All that had to be shown was that the taxpayer had acquired valuable assets from his lease in exchange for the use of his property. The medium of exchange—whether cash or in kind, and whether separately disposable or "affixed"—was immaterial as far as the realization criterion was concerned. In effect, the improvements represented rent, or rather a payment in lieu of rent, which was taxable to the landlord regardless of the form in which it was received.[2]
"Severance" is not necessary for realization:
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.
The Court added that, while not all economic gain is "realized" for taxation purposes, realization does not require that the economic gain be in "cash derived from the sale of an asset". Realization can also arise from property exchange; relief of indebtedness; or other transactions yielding profit—e.g. by receiving an asset with enhanced value in a transaction, even where severance does not occur (i.e. even where "the gain is a portion of the value of property received by the taxpayer in the transaction").
Subsequent legislationedit
Congress nullified the effect of section 22 of the Revenue Act of 1932 (as interpreted by the Court in Bruun) by enacting the Revenue Act of 1942, section 115 of which included an amendment of section 22 of the Internal Revenue Code of 1939.[3] The effect of that amendment to the 1939 Code was carried forward in sections 109 and 1019 of the Internal Revenue Code of 1954 (now the Internal Revenue Code of 1986). Section 109 excludes, from a lessor's income, the value of leasehold improvements realized on termination of a lease. Section 1019 denies the lessor a step-up in basis for the income so excluded. These provisions overrule the proposition announced in Bruun, that repossession of an asset with an enhanced value from a transaction with another party results in recognition of gross income.
The aim of the Revenue Act of 1942 was to relieve lessors—suddenly confronted with large tax obligations—of the need to raise cash in a hurry, at a time when the real estate market was scraping bottom. An inadvertent side effect of the means chosen—permitting current income to be deferred to later period—was to reduce the lessor's tax obligation absolutely, by postponing his realization of any improvements to the sale of the property.[4]
Academic commentaryedit
Does the building of leasehold improvements represent an "accession" to wealth? If it does, is it "clearly realized"? And if it is, when does that realization occur? Four possible answers can be given.[5]
1. Prepaid Rent: Include, as rent at the beginning of the lease, the present value (say $50,000) of the value the improvement is anticipated to have at the end of the lease (say $200,000). When the landlord terminates the lease and repossesses the property, this present value ($50,000) would also be the taxpayer's basis for the improvement.
2. Prorated Rent: Again, treat the anticipated value of the improvement ($200,000) as rent -- however, rather than include its present discounted value ($50,000) in Year 1, spread its realization annually over the term of the lease (say, $10,000 a year for 20 years). When the landlord terminates the lease and repossesses the property, this anticipated [final] value of the improvement ($200,000) would also be the taxpayer's basis for the improvement.
3. Postpaid Rent: Again, treat the anticipated value of the improvement ($200,000) as rent -- however, postpone realization until the termination of the lease. Again, when the landlord terminates the lease and repossesses the property, this anticipated [final] value of the improvement ($200,000) would also be the taxpayer's basis for the improvement.
This was the alternative ultimately approved in Bruun. It has the advantage (over alternatives #1 & #2) of not requiring a prediction of the improvement's future value.
4. No rent at all: Treat the improvement as unrealized property appreciation. Do not tax its value as "rent" at any time. With nothing to include as income, the lessor's basis for the improvement on termination of the lease would be zero.
This was the alternative argued unsuccessfully by the taxpayer in Bruun.
It was also the position held by the pre-Bruun cases. These cases argued that such gain must be treated as unrealized until the entire property was sold for cash. This was because the improvement was physically "merged" with the land -- it could not be severed and disposed of separately from the land, was not "portable and detachable" unless torn down and scrapped.
This is also the current law, under §§109 and 1019, which nullified Bruun.
^Chirelstein, Marvin (2005). Federal Income Taxation: A Law Student's Guide to the Leading Cases and Concepts (Tenth ed.). New York, NY: Foundation Press. p. 87. ISBN1-58778-894-2.
^Chirelstein, Marvin (2005). Federal Income Taxation: A Law Student's Guide to the Leading Cases and Concepts (Tenth ed.). New York, NY: Foundation Press. p. 90. ISBN1-58778-894-2.
^Chirelstein, Marvin (2005). Federal Income Taxation: A Law Student's Guide to the Leading Cases and Concepts (Tenth ed.). New York, NY: Foundation Press. pp. 85–86. ISBN1-58778-894-2.
Further readingedit
Donaldson, Samuel A. (2007). Federal Income Taxation of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul, MN: Thomson/West. pp. 124–127. ISBN978-0-314-17597-7.
External linksedit
Wikisource has original text related to this article:
Helvering v. Bruun
Text of Helvering v. Bruun, 309U.S. 461 (1940) is available from:CornellCourtListenerFindlawGoogle ScholarJustiaLibrary of Congress
May 11, 2024
helvering, bruun, 1940, income, case, before, supreme, court, united, states, notable, thus, appears, frequently, school, casebooks, holding, that, under, section, revenue, 1932, income, need, form, cash, taxable, gain, occur, result, exchange, property, payme. Helvering v Bruun 309 U S 461 1940 was an income tax case before the Supreme Court of the United States It is notable and thus appears frequently in law school casebooks for holding that under section 22 a of the Revenue Act of 1932 income need not be in the form of cash for it to be taxable Gain may occur as a result of exchange of property payment of the taxpayer s indebtedness relief from a liability or other profit realized from the completion of a transaction 1 Helvering v BruunSupreme Court of the United StatesArgued February 28 1940Decided March 25 1940Full case nameHelvering Commissioner of Internal Revenue v BruunCitations309 U S 461 more 60 S Ct 631 84 L Ed 864 1940 U S LEXIS 1245Case historyPrior105 F 2d 442 8th Cir 1939 cert granted 308 U S 544 1939 SubsequentOn remand 112 F 2d 573 8th Cir 1940 HoldingA taxpayer realized a gain after repossessing property improved by a tenant Court membershipChief Justice Charles E Hughes Associate Justices James C McReynolds Harlan F StoneOwen Roberts Hugo BlackStanley F Reed Felix FrankfurterWilliam O Douglas Frank MurphyCase opinionMajorityRoberts joined by unanimous courtMcReynolds took no part in the consideration or decision of the case Superseded by 109 and 1019 of the Internal Revenue Code Contents 1 Facts 2 Holding 3 Subsequent legislation 4 Academic commentary 5 See also 6 References 7 Further reading 8 External linksFacts editA landlord repossessed land from a tenant who had defaulted in the eighteenth year of a 99 year lease During the course of the lease the tenant had torn down an old building in which the landlord s adjusted basis was now 12 811 43 and had built a new one whose value was now 64 245 68 The lease had specified that the landlord was not required to compensate the tenant for these improvements The government argued that upon repossession the landlord realized a gain of 51 434 25 The landlord argued that there was no realization of the property because no transaction had occurred and because the improvement of the property that created the gain was not severable from the landlord s original capital Holding editThe court held for the government under the Revenue Act of 1932 the value of the improvements was realized by the taxpayer as income in the year in which the forfeiture occurred The improvements the Court observed were received by the taxpayer as a result of a business transaction namely the leasing of the taxpayer s land It was not necessary to the recognition of gain that the improvements be severable from the land All that had to be shown was that the taxpayer had acquired valuable assets from his lease in exchange for the use of his property The medium of exchange whether cash or in kind and whether separately disposable or affixed was immaterial as far as the realization criterion was concerned In effect the improvements represented rent or rather a payment in lieu of rent which was taxable to the landlord regardless of the form in which it was received 2 Severance is not necessary for realization 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 The Court added that while not all economic gain is realized for taxation purposes realization does not require that the economic gain be in cash derived from the sale of an asset Realization can also arise from property exchange relief of indebtedness or other transactions yielding profit e g by receiving an asset with enhanced value in a transaction even where severance does not occur i e even where the gain is a portion of the value of property received by the taxpayer in the transaction Subsequent legislation editCongress nullified the effect of section 22 of the Revenue Act of 1932 as interpreted by the Court in Bruun by enacting the Revenue Act of 1942 section 115 of which included an amendment of section 22 of the Internal Revenue Code of 1939 3 The effect of that amendment to the 1939 Code was carried forward in sections 109 and 1019 of the Internal Revenue Code of 1954 now the Internal Revenue Code of 1986 Section 109 excludes from a lessor s income the value of leasehold improvements realized on termination of a lease Section 1019 denies the lessor a step up in basis for the income so excluded These provisions overrule the proposition announced in Bruun that repossession of an asset with an enhanced value from a transaction with another party results in recognition of gross income The aim of the Revenue Act of 1942 was to relieve lessors suddenly confronted with large tax obligations of the need to raise cash in a hurry at a time when the real estate market was scraping bottom An inadvertent side effect of the means chosen permitting current income to be deferred to later period was to reduce the lessor s tax obligation absolutely by postponing his realization of any improvements to the sale of the property 4 Academic commentary editDoes the building of leasehold improvements represent an accession to wealth If it does is it clearly realized And if it is when does that realization occur Four possible answers can be given 5 1 Prepaid Rent Include as rent at the beginning of the lease the present value say 50 000 of the value the improvement is anticipated to have at the end of the lease say 200 000 When the landlord terminates the lease and repossesses the property this present value 50 000 would also be the taxpayer s basis for the improvement 2 Prorated Rent Again treat the anticipated value of the improvement 200 000 as rent however rather than include its present discounted value 50 000 in Year 1 spread its realization annually over the term of the lease say 10 000 a year for 20 years When the landlord terminates the lease and repossesses the property this anticipated final value of the improvement 200 000 would also be the taxpayer s basis for the improvement 3 Postpaid Rent Again treat the anticipated value of the improvement 200 000 as rent however postpone realization until the termination of the lease Again when the landlord terminates the lease and repossesses the property this anticipated final value of the improvement 200 000 would also be the taxpayer s basis for the improvement This was the alternative ultimately approved in Bruun It has the advantage over alternatives 1 amp 2 of not requiring a prediction of the improvement s future value dd 4 No rent at all Treat the improvement as unrealized property appreciation Do not tax its value as rent at any time With nothing to include as income the lessor s basis for the improvement on termination of the lease would be zero This was the alternative argued unsuccessfully by the taxpayer in Bruun It was also the position held by the pre Bruun cases These cases argued that such gain must be treated as unrealized until the entire property was sold for cash This was because the improvement was physically merged with the land it could not be severed and disposed of separately from the land was not portable and detachable unless torn down and scrapped This is also the current law under 109 and 1019 which nullified Bruun dd See also editList of United States Supreme Court cases volume 309 Cottage Savings Ass n v CommissionerReferences edit Helvering v Bruun 309 U S 461 1940 Chirelstein Marvin 2005 Federal Income Taxation A Law Student s Guide to the Leading Cases and Concepts Tenth ed New York NY Foundation Press p 87 ISBN 1 58778 894 2 Section 115 Revenue Act of 1942 56 Stat 798 812 Oct 21 1942 Chirelstein Marvin 2005 Federal Income Taxation A Law Student s Guide to the Leading Cases and Concepts Tenth ed New York NY Foundation Press p 90 ISBN 1 58778 894 2 Chirelstein Marvin 2005 Federal Income Taxation A Law Student s Guide to the Leading Cases and Concepts Tenth ed New York NY Foundation Press pp 85 86 ISBN 1 58778 894 2 Further reading editDonaldson Samuel A 2007 Federal Income Taxation of Individuals Cases Problems and Materials 2nd ed St Paul MN Thomson West pp 124 127 ISBN 978 0 314 17597 7 External links edit nbsp Wikisource has original text related to this article Helvering v Bruun Text of Helvering v Bruun 309 U S 461 1940 is available from Cornell CourtListener Findlaw Google Scholar Justia Library of Congress Retrieved from https en wikipedia org w index php title Helvering v Bruun amp oldid 1175143469, wikipedia, wiki, book, books, library,
