1

Opinion of the Court.

9 15

"Equity" is not given as a synonym, nor do either of the foregoing definitions suggest that it could be correctly so used. Indeed, "equity" is defined as "the value of a property . . . above the total of the liens. The contradistinction could hardly be more pointed. Strong. countervailing considerations would be required to support a contention that Congress, in using the word "property," meant "equity," or that we should impute to it the intent to convey that meaning.16

In the second place, the Commissioner's position has the approval of the administrative construction of § 113 (a) (5). With respect to the valuation of property under that section, Reg. 101, Art. 113 (a) (5)-1, promulgated under the 1938 Act, provided that "the value of property as of the date of the death of the decedent as appraised for the purpose of the Federal estate tax. . . shall be deemed to be its fair market value . . . The land and building here involved were so appraised in 1932, and their appraised value-$262,042.50-was reported by petitioner as part of the gross estate. This was in accordance with the estate tax law" and regulations, 18 which had always required that the value of decedent's property, undiminished by liens, be so appraised and returned, and that mortgages be separately deducted in computing the net estate.1o As the quoted provision of the Regula

15 See Webster's New International Dictionary, supra. 16 Crooks v. Harrelson, 282 U. S. 55, 59.

17 See §§ 202 and 203 (a) (1), Revenue Act of 1916; §§ 402 and 403 (a) (1), Revenue Acts of 1918 and 1921; §§ 302, 303 (a) (1), Revenue Acts of 1924 and 1926; § 805, Revenue Act of 1932.

18 See Reg. 37, Arts. 13, 14, and 47; Reg. 63, Arts. 12, 13, and 41; Reg. 68, Arts. 11, 13, and 38; Reg. 70, Arts. 11, 13, and 38; Reg. 80, Arts. 11, 13, and 38.

19 See City Bank Farmers' Trust Co. v. Bowers, 68 F. 2d 909, cert. denied, 292 U. S. 644; Rodiek v. Helvering, 87 F. 2d 328; Adriance v. Higgins, 113 F. 2d 1013.

Opinion of the Court.

331 U.S.

tions has been in effect since 1918,20 and as the relevant statutory provision has been repeatedly reenacted since then in substantially the same form," the former may itself now be considered to have the force of law.22

Moreover, in the many instances in other parts of the Act in which Congress has used the word "property," or expressed the idea of "property" or "equity," we find no instances of a misuse of either word or of a confusion of the ideas.23 In some parts of the Act other than the gain and loss sections, we find "property" where it is unmistakably used in its ordinary sense." On the other hand, where either Congress or the Treasury intended to convey the meaning of "equity," it did so by the use of appropriate language."

20 See also Reg. 45, Art. 1562; Reg. 62, Art. 1563; Reg. 65, Art. 1594; Reg. 69, Art. 1594; Reg. 74, Art. 596; Reg. 77, Art. 596; Reg. 86, Art. 113 (a) (5)-1 (c); Reg. 94, Art. 113 (a) (5)-1 (c); Reg. 103, § 19.113 (a) (5)-1 (c); Reg. 111, § 29.113 (a) (5)-1 (c).

21 § 202 (a) (3), Revenue Act of 1921; § 204 (a) (5), Revenue Act of 1924; § 204 (a) (5), Revenue Act of 1926; § 113 (a) (5), Revenue Act of 1928; § 113 (a) (5), Revenue Act of 1932; § 113 (a) (5), Revenue Act of 1934; § 113 (a) (5), Revenue Act of 1936; § 113 (a) (5), Revenue Act of 1938; § 113 (a) (5), Internal Revenue Code.

22 Helvering y. Reynolds Co., 306 U. S. 110, 114.

23 Cf. Helvering v. Stockholms Bank, 293 U. S. 84, 87.

24 Sec. 23 (a) (1) permits the deduction from gross income of "rentals .. required to be made as a condition to the continued use . . . for purposes of the trade or business, of property . . . in which he [the taxpayer] has no equity." (Italics supplied.)

Sec. 23 (1) permits the deduction from gross income of "a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business . . . ." (Italics supplied.)

See also § 303 (a) (1), Revenue Act of 1926, c. 27, 44 Stat. 9; § 805, Revenue Act of 1932, c. 209, 47 Stat. 280.

25 See § 23 (a) (1), supra, note 24; § 805, Revenue Act of 1932, supra, note 24; § 3482, I. R. C.; Reg. 105, § 81.38. This provision of the Regulations, first appearing in 1937, T. D. 4729, 1937-1 Cum. Bull. 284, 289, permitted estates which were not liable on mortgages

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Opinion of the Court.

A further reason why the word "property" in § 113 (a) should not be construed to mean "equity" is the bearing such construction would have on the allowance of deductions for depreciation and on the collateral adjustments of basis.

Section 23 (1) permits deduction from gross income of "a reasonable allowance for the exhaustion, wear and tear of property. Sections 23 (n) and 114 (a) declare that the "basis upon which exhaustion, wear and tear . . . are to be allowed" is the basis "provided in section 113 (b) for the purpose of determining the gain upon the sale" ofthe property, which is the § 113 (a) basis "adjusted

for exhaustion, wear and tear. . . to the extent allowed (but not less than the amount allowable). . . ."

26

Under these provisions, if the mortgagor's equity were the § 113 (a) basis, it would also be the original basis from which depreciation allowances are deducted. If it is, and if the amount of the annual allowances were to be computed on that value, as would then seem to be required,2 they will represent only a fraction of the cost of the corresponding physical exhaustion, and any recoupment by the mortgagor of the remainder of that cost can be effected only by the reduction of his taxable gain in the year of sale." If, however, the amount of the annual allowances

applicable to certain of decedent's property to return "only the value of the equity of redemption (or value of the property, less the indebtedness) . . . .”

26 Secs: 23 (n) and 114 (a), in defining the "basis upon which" depreciation is "to be allowed," do not distinguish between basis as the minuend from which the allowances are to be deducted, and as the dividend from which the amount of the allowance is to be computed. The Regulations indicate that the basis of property is the same for both purposes. Reg. 101, Art. 23 (1)−4, 5.

27 This is contrary to Treasury practice, and to Reg. 101, Art. 23 (1)-5, which provides in part:

"The capital sum to be recovered shall be charged off over the useful life of the property, either in equal annual installments or in accord

Opinion of the Court.

331 U.S.. were to be computed on the value of the property, and then deducted from an equity basis, we would in some instances have to accept deductions from a minus basis or deny deductions altogether.28 The Commissioner also argues that taking the mortgagor's equity as the § 113 (a) basis would require the basis to be changed with each payment on the mortgage,20 and that the attendant problem of repeatedly recomputing basis and annual allowances would be a tremendous accounting burden on both the Commissioner and the taxpayer. Moreover, the mortgagor would acquire control over the timing of his depreciation allowances.

Thus it appears that the applicable provisions of the Act expressly preclude an equity basis, and the use of it is contrary to certain implicit principles of income tax depreciation, and entails very great administrative difficulties.30 It may be added that the Treasury has never furnished a guide through the maze of problems that arise in connection with depreciating an equity basis, but, on the contrary, has consistently permitted the amount of depreciation allowances to be computed on the full value of the property, and subtracted from it as a basis. Surely,

ance with any other recognized trade practice, such as an apportionment of the capital sum over units of production."

See Detroit Edison Co. v. Commissioner, 319 U. S. 98, 101.

28 So long as the mortgagor remains in possession, the mortgagee can not take depreciation deductions, even if he is the one who actually sustains the capital loss, as § 23 (1) allows them only on property "used in the trade or business.”

29 Sec. 113 (b) (1) (A) requires adjustment of basis "for expenditures ... properly chargeable to capital account . . . .'

30 Obviously we are not considering a situation in which a taxpayer has acquired and sold an equity of redemption only, i. e., a right to redeem the property without a right to present possession. In that situation, the right to redeem would itself be the aggregate of the taxpayer's rights and would undoubtedly constitute "property" within the meaning of § 113 (a). No depreciation problems would arise. See note 28.

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Opinion of the Court.

Congress' long-continued acceptance of this situation gives it full legislative endorsement."1

We conclude that the proper basis under § 113 (a) (5) is the value of the property, undiminished by mortgages thereon, and that the correct basis here was $262.042.50. The next step is to ascertain what adjustments are required under § 113 (b). As the depreciation rate was stipulated, the only question at this point is whether the Commissioner was warranted in making any depreciation adjustments whatsoever.

Section 113 (b) (1) (B) provides that "proper adjustment in respect of the property shall in all cases be made . . for exhaustion, wear and tear to the extent allowed (but not less than the amount allowable) (Italics supplied.) The Tax Court found on adequate evidence that the apartment house was property of a kind subject to physical exhaustion, that it was used in taxpayer's trade or business, and consequently that the taxpayer would have been entitled to a depreciation. allowance under § 23 (1), except that, in the opinion of that Court, the basis of the property was zero, and it was thought that depreciation could not be taken on a zero basis. As we have just decided that the correct basis of the property was not zero, but $262,042.50, we avoid this difficulty, and conclude that an adjustment should be made as the Commissioner determined.

Petitioner urges to the contrary that she was not entitled to depreciation deductions, whatever the basis of the property, because the law allows them only to one who actually bears the capital loss,32 and here the loss was not hers but the mortgagee's. We do not see, however, that she has established her factual premise. There was no finding of the Tax Court to that effect, nor to the effect

31 See note 22.

32 See Helvering v. Lazarus & Co., 308 U. S. 252; Duffy v. Central R. Co., 268 U. S. 55, 64.