CASES ADJUDGED IN THE SUPREME COURT OF THE UNITED STATES AT OCTOBER TERM, 1946. CRANE v. COMMISSIONER OF INTERNAL CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT. No. 68. Argued December 11, 1946.-Decided April 14, 1947. 1. Under § 113 (a) (5) of the Revenue Act of 1938, the "unadjusted basis" for determining gain or loss on the sale of physical property acquired by bequest subject to an unassumed mortgage is the value of the property undiminished by the amount of the mortgage. Pp. 5-11. The word "property," as used in that section, means a physical thing which is a subject of ownership or the owner's legal rights therein and not merely his "equity" after deducting the amount of mortgages or other liens. Pp. 5-11. 2. Under § 113 (b) (1) (B) of the Revenue Act of 1938, a taxpayer who acquired an apartment house by bequest subject to an unassumed mortgage equal to the value thereof, operated it for several years, and sold it for a price slightly in excess of the amount of the mortgage, was entitled to deductions for depreciation on the building; and the "adjusted basis" for determining gain or loss on the sale is to be determined by deducting such depreciation allowances from the value of the property at the time of acquisition. Pp. 11-12. 3. Under § 111 (b) of the Revenue Act of 1938, the "amount realized" on a sale of property for cash subject to an existing mortgage is the amount of the cash realized plus the amount of the mortgage, 1 Opinion of the Court. 331 U.S. even though the seller had acquired the property subject to the mortgage, which he never assumed, and the buyer neither assumed nor paid the mortgage. Pp. 12-14. 4. On an appeal from a decision of the Tax Court, the Circuit Court of Appeals had jurisdiction to review determinations by the Tax Court that "property" as used in § 113 (a) and related sections of the Revenue Act of 1938 means "equity," and that the amount of a mortgage subject to which property is sold is not the measure of a benefit realized within the meaning of § 111 (b), since these determinations announced rules of general applicability on clearcut questions of law. P. 15. 5. As here construed, the Revenue Act of 1938 does not tax something which is not "income" within the meaning of the Sixteenth Amendment. Pp. 15-16 153 F.2d 504, affirmed. The Tax Court expunged part of a deficiency determined by the Commissioner of Internal Revenue on account of the income tax on a gain realized on the sale of an apartment house which had been acquired by the taxpayer by bequest subject to an unassumed mortgage. 3 T. C. 585. The Circuit Court of Appeals reversed. 153 F. 2d 504. This Court granted certiorari. 328 U. S. 826. Affirmed, P. 16. Edward S. Bentley argued the cause and filed a brief for petitioner. J. Louis Monarch argued the cause for respondent. With him on the brief were Acting Solicitor General Washington, Sewall Key and Morton K. Rothschild. MR. CHIEF JUSTICE VINSON delivered the opinion of the Court. The question here is how a taxpayer who acquires depreciable property subject to an unassumed mortgage, holds it for a period, and finally sells it still so encumbered, must compute her taxable gain. 1 Opinion of the Court. Petitioner was the sole beneficiary and the executrix of the will of her husband, who died January 11, 1932. He then owned an apartment building and lot subject to a mortgage,' which secured a principal debt of $255,000.00 and interest in default of $7,042.50. As of that date, the property was appraised for federal estate tax purposes at a value exactly equal to the total amount of this encumbrance. Shortly after her husband's death, petitioner entered into an agreement with the mortgagee whereby she was to continue to operate the property-collecting the rents, paying for necessary repairs, labor, and other operating expenses, and reserving $200.00 monthly for taxes-and was to remit the net rentals to the mortgagee. This plan was followed for nearly seven years, during which period petitioner reported the gross rentals as income, and claimed and was allowed deductions for taxes and operating expenses paid on the property, for interest paid on the mortgage, and for the physical exhaustion of the building. Meanwhile, the arrearage of interest increased to $15,857.71. On November 29, 1938, with the mortgagee threatening foreclosure, petitioner sold to a third party for $3,000.00 cash, subject to the mortgage, and paid $500.00 expenses of sale. Petitioner reported a taxable gain of $1,250.00. Her theory was that the "property" which she had acquired in 1932 and sold in 1938 was only the equity, or the excess in the value of the apartment building and lot over the amount of the mortgage. This equity was of zero value when she acquired it. No depreciation could be taken on a zero value. Neither she nor her vendee ever assumed 1 The record does not show whether he was personally liable for the debt. 2 This position is, of course, inconsistent with her practice in claiming such deductions in each of the years the property was held. The deductions so claimed and allowed by the Commissioner were in the total amount of $25,500.00. |