Helvering v. Bruun
1940 U.S. LEXIS 1245, 60 S. Ct. 631, 309 U.S. 461 (1940)
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Rule of Law:
A lessor realizes taxable income when, upon forfeiture of a lease, they regain possession of a property that has been enhanced in value by a permanent improvement constructed by the lessee. This gain is realized in the year of repossession.
Facts:
- On July 1, 1915, the respondent, Bruun, leased a lot and building for a 99-year term.
- The lease permitted the tenant to demolish the existing building and construct a new one, provided that all buildings and improvements would belong to Bruun upon the lease's termination.
- In 1929, the tenant demolished the old building and erected a new one with a useful life of not more than fifty years.
- On July 1, 1933, the lease was canceled because the tenant defaulted on rent and tax payments.
- Bruun regained possession of the land and the new building.
- The parties stipulated that on the date of repossession, the new building added a net fair market value of $51,434.25 to the property.
Procedural Posture:
- The Commissioner of Internal Revenue (Helvering) determined that Bruun realized taxable income in 1933 from the forfeiture of a leasehold.
- Bruun contested the determination in the Board of Tax Appeals.
- The Board of Tax Appeals overruled the Commissioner's determination, finding for Bruun.
- The Commissioner, as appellant, appealed the Board's decision to the U.S. Circuit Court of Appeals for the Eighth Circuit.
- The Circuit Court of Appeals affirmed the decision of the Board of Tax Appeals.
- The Commissioner petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does a lessor realize taxable income under the Revenue Act of 1932 upon the forfeiture of a lease, when the lessor regains possession of the real estate which has appreciated in value due to a new building erected by the lessee?
Opinions:
Majority - Mr. Justice Roberts
Yes. A lessor realizes taxable income upon regaining possession of a property that has been enhanced in value by lessee-constructed improvements. The definition of gross income under the Revenue Act is broad enough to encompass this gain. Realization of income does not require the receipt of cash or a severable asset; it can occur from the completion of a transaction that provides a demonstrable economic gain. In this case, the termination of the lease was a completed transaction through which Bruun received back his land with a building of ascertainable value, representing a realized gain. The Court distinguished this from stock dividend cases like Eisner v. Macomber, where the taxpayer's interest remains proportionally the same, arguing that here, Bruun acquired a valuable asset he did not previously possess in that form.
Concurring - The Chief Justice
Yes. The Chief Justice concurs in the result based on the specific terms of the stipulation of facts.
Analysis:
This decision established a key principle of 'realization' in tax law, clarifying that an economic gain is taxable when a transaction is completed, even if the gain is not in cash and is physically attached to an existing capital asset. It resolved a conflict among lower courts and Treasury regulations regarding the timing of taxing lessee improvements. Although Congress legislatively overruled this specific outcome in 1942 (creating I.R.C. § 109 to exclude such value from income), the case remains a foundational authority on the concept of realization and the broad definition of gross income.
