Dobson v. Commissioner

In 1929, Collins (plaintiff) bought 300 shares of stock of the National City Bank of New York from the National City Company. In 1930, Collins sold 100 shares at a loss of $41,600, which he successfully deducted on his tax return for that year. In 1931, Collins sold an additional 100 shares at a loss of $28,163, which he successfully deducted on his tax return for that year. Collins retained the remaining 100 shares. In 1936, upon learning that the stock had not been properly registered, Collins sued the seller for fraud and failure to register. In 1939, the lawsuit was settled, and Collins recovered $45,150, of which $23,296 was attributable to the stock sold in 1930 and $6,454 was attributable to the stock sold in 1931. Collins did not report any part of the recovery on his 1939 tax return. The commissioner of internal revenue (defendant) adjusted Collins’s 1939 gross income by adding as ordinary gain the portion of the recovery attributable to the shares he sold, but not the portion attributable to the shares he retained. The recovery attributable to the shares Collins sold did not make up for his original investment in the shares, nor would those amounts, if combined with the proceeds from 1930 and 1931, have changed Collins’s tax liability in those years. Collins sought a redetermination in the tax court, arguing that the 1939 recovery was a return of capital from which he realized no taxable gain and he received no tax benefit from the prior loss deductions. The tax court agreed with Collins, but the appellate court held that the recovery was taxable income.