Commissioner v. Gillette Motor Transport, Inc.

Citations: 4 L. Ed. 2d 1617; 80 S. Ct. 1497; 364 U.S. 130; 1960 U.S. LEXIS 1972; 2 C.B. 466; 5 A.F.T.R.2d (RIA) 1770Docket: 359

Court: Supreme Court of the United States; June 27, 1960; Federal Supreme Court; Federal Appellate Court

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The case addresses whether compensation received by Gillette Motor Transport, Inc. (respondent) from the U.S. government for the temporary taking of its business facilities during World War II should be classified as ordinary income or a capital gain under § 117(j) of the Internal Revenue Code of 1939. In 1944, after its operations ceased due to a strike, the government took control of respondent's facilities for war material transportation, appointing a Federal Manager who allowed the company to continue operating with minimal interference until control was returned in 1945.

Respondent later claimed compensation for the "taking" through the Motor Carrier Claims Commission. The Commission found that the government’s actions deprived respondent of the right to use its property freely, determining the fair market value based on potential rental income. Respondent was awarded $157,843.99 in total compensation in 1952.

The Commissioner of Internal Revenue argued that this compensation should be treated as ordinary income, while respondent argued it was an involuntary conversion of property, thus qualifying for long-term capital gains treatment. The Tax Court initially sided with the Commissioner, but the Court of Appeals reversed this decision, prompting a certiorari granted due to conflicting circuit decisions.

The Motor Carrier Claims Commission found that the respondent had been deprived of property, awarding compensation for the taking, which was determined to be the right to freely use its transportation facilities. However, the classification of this compensable property under the Fifth Amendment does not automatically qualify it under the capital-gains provisions of the Internal Revenue Code. Section 117(j) of the Internal Revenue Code, which the respondent cites, is part of a broader framework governing capital gains and losses. For capital gains treatment, two criteria must be met: the existence of a 'capital asset' and a 'sale or exchange' of that asset. A 'capital asset' is defined as 'property held by the taxpayer,' excluding certain categories not relevant in this case.

Section 117(j), introduced by the Revenue Act of 1942, did not alter the fundamental nature of a capital asset but aimed to extend capital-gains treatment to real and depreciable personal property used in trade or business, as well as involuntary conversions of capital assets. This extension requires that property used in trade or business must still meet the criteria for capital assets. The Court has historically interpreted 'capital asset' narrowly, aligning with Congressional intent to limit capital-gains treatment to situations involving long-term appreciation. Not all property that can be considered property in a general sense qualifies as a capital asset, as established in prior case law, which has excluded items such as unexpired leases and corn futures from capital asset status, despite being property interests.

Respondent's right to use its transportation facilities is recognized as a valuable property right eligible for compensation under the Fifth Amendment; however, it does not qualify as a capital asset under § 117(a)(1) and § 117(j). While the facilities themselves are considered capital assets, the government's action only involved the right to dictate their use, which does not constitute a separate investment. Consequently, there is no basis to assign a cost to this right for gain calculation purposes under § 117. The right to use is viewed as an incident of the physical property, akin to rent, and does not trigger the capital-gains provisions intended for investments appreciating over time.

The respondent argues that the government's actions constitute a seizure or requisition as outlined in § 117(j), suggesting these terms imply the classification as a capital transaction. However, the court clarifies that the seizure or requisition must pertain to property used in trade or business or capital assets, which does not apply in this case. The terms 'seizure' and 'requisition' remain effective for situations involving physical property impairment. The conclusion is that the compensation received for the use of the facilities from August 12, 1944, to June 16, 1945, is categorized as ordinary income, including any interest on that sum. The decision is reversed, with a dissent from Mr. Justice Douglas. Section 117(j) defines property used in trade or business and outlines the rules for recognizing gains and losses from such transactions.