Source: https://supreme.justia.com/cases/federal/us/364/130/
Timestamp: 2019-04-22 08:53:40+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 364 › Commissioner v. Gillette Motor Transport, Inc.
Respondent trucking company ceased operations during World War II because of a strike, and the Director of the Office of Defense Transportation took possession and assumed control of its business but left title to its properties in respondent, which resumed normal operations and functioned under the control of a federal manager until termination of possession and control by the Government. The Motor Carrier Claims Commission determined that, by assuming possession and control of respondent's facilities, the Government had deprived it of the right to determine freely what use was to be made of them, and it awarded to respondent as compensation a sum representing the fair rental value of its facilities during the period of government control.
Held: under the Internal Revenue Code of 1939, this award constituted ordinary income, and not a capital gain resulting from an "involuntary conversion" of respondent's capital assets consisting of real or depreciable personal property used in its trade or business, within the meaning of §117(j). Pp. 364 U. S. 130-136.
and application of § 117(j) of the Internal Revenue Code of 1939.
and a willing lessee. Accordingly, it awarded, and the respondent received in 1952, the sum of $122,926.21, representing the fair rental value of its facilities from August 12, 1944, until June 16, 1945, plus $34,917.78, representing interest on the former sum, or a total of $157,843.99.
The Tax Court, adopting its opinion in Midwest Motor Express, Inc., 27 T.C. 167, affirmed, 251 F.2d 405, which involved substantially identical facts, held that the award represented ordinary income. The Court of Appeals, one judge dissenting, in this instance reversed. 265 F.2d 648. We granted certiorari because of the conflict between the decisions of the two Circuits. 361 U.S. 881.
Respondent stresses that the Motor Carrier Claims Commission, rejecting the Government's contention that only a regulation, rather than a taking, of its facilities had occurred, found that respondent had been deprived of property, and awarded compensation therefor. That is indeed true. But the fact that something taken by the Government is property compensable under the Fifth Amendment does not answer the entirely different question whether that thing comes within the capital gains provisions of the Internal Revenue Code. Rather, it is necessary to determine the precise nature of the property taken. Here, the Commission determined that what respondent had been deprived of, and what the Government was obligated to pay for, was the right to determine freely what use to make of its transportation facilities. The measure of compensation adopted reflected the nature of that property right. Given these facts, we turn to the statute.
calculating gain, the cost or other basis of the property (§ 113(b)) must be subtracted from the amount realized on the sale or exchange (§ 111(a)).
Section 117(j), added by the Revenue Act of 1942, effects no change in the nature of a capital asset. It accomplishes only two main objectives. First, it extends capital gains treatment to real and depreciable personal property used in the trade or business, the type of property involved in this case. Second, it accords such treatment to involuntary conversions of both capital assets, strictly defined, and property used in the trade or business. Since the net effect of the first change is merely to remove one of the exclusions made to the definition of capital assets in § 117(a)(1), it seems evident that "property used in the trade or business," to be eligible for capital gains treatment, must satisfy the same general criteria as govern the definition of capital assets. The second change was apparently required by the fact that this Court had given a narrow construction to the term "sale or exchange." See Helvering v. William Flaccus Oak Leather Co., 313 U. S. 247. But that change similarly had no effect on the basic notion of what constitutes a capital asset.
and oil payment rights, Commissioner v. P. G. Lake, Inc., 356 U. S. 260, are not capital assets, even though they are concededly "property" interests in the ordinary sense. And see Surrey, Definitional Problems in Capital Gains Taxation, 69 Harv.L.Rev. 985, 987-989 and Note 7.
In the present case, respondent's right to use its transportation facilities was held to be a valuable property right compensable under the requirements of the Fifth Amendment. However, that right was not a capital asset within the meaning of §§ 117(a)(1) and 117(j). To be sure, respondent's facilities were themselves property embraceable as capital assets under § 117(j). Had the Government taken a fee in those facilities, or damaged them physically beyond the ordinary wear and tear incident to normal use, the resulting compensation would no doubt have been treated as gain from the involuntary conversion of capital assets. See, e.g., Waggoner, 15 T.C. 496; Henshaw, 23 T.C. 176. But here, the Government took only the right to determine the use to which those facilities were to be put.
and the fact that the transaction was involuntary on respondent's part does not change the nature of the case.
"involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets. . . ."
(Emphasis added.) It is contended that the Government's action in the present case is perhaps the most typical example of a seizure or requisition, and that, therefore, Congress must have intended to treat it as a capital transaction. This argument, however, overlooks the fact that the seizure or requisition must be "of property used in the trade or business [or] capital assets." We have already shown that § 117(j) does not change the longstanding meaning of these terms, and that the property taken by the Government in the present case does not come within them. The words "seizure" and "requisition" are not thereby deprived of effect, since they equally cover instances in which the Government takes a fee or damages or otherwise impairs the value of physical property.
We conclude that the amount paid to respondent as the fair rental value of its facilities from August 12, 1944, to June 16, 1945, represented ordinary income to it. A fortiori, the interest on that sum is ordinary income. Kieselbach v. Commissioner, 317 U. S. 399.
"Gains and losses from involuntary conversion and from the sale or exchange of certain property used in the trade or business --"
"(1) Definition of property used in the trade or business."
"For the purposes of this subsection, the term 'property used in the trade or business' means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. . . ."
"If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. . . ."

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