Nature of the Case
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Facts
From 1913 to 1915 Sanford and Brooks (D) engaged in a for-profit business in carrying out a contract for dredging the Delaware River. In making its income tax returns for 1913-16 D added gross income for each year the payments were made under the contract year and deducted its expenses paid that year in performing the contract. The total expenses exceeded payments by $176,271.88. The tax returns for 1913,1915, and 1916 showed net losses. The 1914 return showed a net profit. In 1915, work under the contract had been abandoned and in 1916 suit was brought in the Court of Claims to recover for a breach of warranty. Judgment for the claimant was affirmed in 1920. The holding, in that case, held that recovery under the contract was compensatory of the cost of the work, of which the government got the benefit. That year, D got $192,577.59 which included the $176,271.88 and accrued interest of $16,305.71 D failed to include these amounts as gross income in its tax returns for 1920. The Commissioner made an assessment based on the additions of both items to gross income for that year. The Court of Appeals ruled that only the item of interest was properly included holding that the $176,271.88 was a return of losses suffered and hence was wrongly assessed as income. That court made its ruling contingent upon the refilling of returns for 1913-1916 from which were omitted the deductions of the related items of expenses paid in those years thus presenting a true picture of D’s profits. D insists that the 16th Amendment and the Revenue Act of 1918 plainly contemplated a tax only on net income or profits and any application of the statute which operates to impose a tax with respect to the present transaction cannot be upheld.
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