Commissioner v. Pittson Company
252 F.2d 344 (1958)
Pittston was in the business
of selling coal. They made a deal with a mining company called Russell.
Pittson loaned $250k to Russell, and in addition to repaying the loan
Russell agreed to sell coal to Pittson at an 8% discount for 10 years.
Even after the loan was
repaid, Russell was still obligated to sell discounted coal to Pittston,
so it was a pretty sweet deal for Pittson.
After a few years they made a
new deal where Pittston took $500k to terminate the agreement to sell
When they filed their taxes,
Pittston claimed the $500k as a capital gain. The IRS disagreed and assessed a deficiency.
Pittston argued that they
were not in the business of selling contract rights to discounted coal.
Therefore they were simply selling a capital asset.
The IRS argued that since
Pittson made money by selling coal, the amount of ordinary income they made was related to the buy price of the
coal. Therefore the 8% discount represented 8% more ordinary
Therefore Pittston hadn't
sold a capital asset at all, they
just collected a lot of ordinary income at once instead of over the next several
See Hort v. Commissioner (313 U.S. 28 (1941)).
The Tax Court found for
Pittson. The IRS appealed.
The Appellate Court reversed
and found that the $500k should be taxed as ordinary income.
The Appellate Court found
that since the contract represented nothing more than the right to
collect more future ordinary income,
it was a naked contract right.
The Court found that when a
payment is realized to terminate a naked contract right, that payment is considered ordinary