Burnet v. Sanford & Brooks Co.

Holding

The federal income tax operates on an annual accounting basis; a litigation recovery in a later year compensating for prior-year losses is gross income in the year received, not netted against the earlier losses.

Facts

Sanford & Brooks performed a dredging contract from 1913 to 1916 at a loss. In 1920 it received a judgment in breach-of-contract litigation that reimbursed it for the earlier losses. The taxpayer argued the recovery should be excluded because it merely returned capital lost in earlier years.

Reasoning

The Court emphasized that the annual accounting period is fundamental to the federal income tax system. Each year's tax is computed on that year's transactions, and a recovery received in a later year is income in that year regardless of prior unrecovered losses.