From 1913 to 1916, Sanford & Brooks Company (S&B) (plaintiff) performed contractual work for the United States government (government). The government failed to adequately compensate S&B for the contract expenses. Consequently, S&B’s federal tax returns showed net losses for 1913, 1915, and 1916. S&B sued the government to recover its losses on the contract and was finally reimbursed in 1920 for those losses. S&B did not report the reimbursement as part of its gross income for 1920, reasoning that federal tax law imposed income taxes only on the net profits of a transaction. The reimbursement compensated S&B for its losses on the contract, but left S&B with no net profit. The commissioner of internal revenue (commissioner) (defendant) determined that S&B should have included the reimbursement in its gross income for 1920, and assessed back taxes. S&B petitioned the Board of Tax Appeals for review, which ruled for the commissioner. S&B appealed. The United States Court of Appeals for the Fourth Circuit reversed, holding that the reimbursement was not income to S&B, but rather a return of S&B’s losses on the contract. The United States Supreme Court granted certiorari to review.