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Law School Case Brief

Crane v. Commissioner - 331 U.S. 1, 67 S. Ct. 1047 (1947)


I.R.C. § 111 (b) (1938) defines the "amount realized" from "the sale of property" as "the sum of any money received plus the fair market value of the property (other than money) received. " Section  111 (a) defines the gain on "the sale of property" as the excess of the amount realized over the basis.


Petitioner was the sole beneficiary and the executrix of the will of her husband, who died in 1932. He then owned an apartment building and a lot subject to a mortgage, which secured a principal debt of $ 255,000 and interest in default of $ 7,042. 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 monthly for taxes -- and was to remit the net rentals to the mortgagee. Nevertheless, the arrearage of interest increased to $ 15,857. In November 1938, with the mortgagee threatening foreclosure, petitioner sold to a third party for $ 3,000 cash, subject to the mortgage, and paid $ 500 expenses of sale. Petitioner reported a taxable gain of $ 1,250. 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. Respondent Commissioner of the Internal Revenue Service, however, determined that petitioner realized a net taxable gain of $ 23,767. His theory was that the "property" acquired and sold was not the equity, as petitioner claimed, but rather the physical property itself, or the owner's rights to possess, use, and dispose of it, undiminished by the mortgage. The Commissioner agreed that the land was a "capital asset," but thought that the building was not. Thus, he determined that petitioner sustained a capital loss of $ 528 on the land, of which 50 percent or $ 264 was taken into account, and an ordinary gain of $ 24,031 on the building, or a net taxable gain as indicated. The Tax Court agreed with the Commissioner that the building was not a "capital asset." In all other respects it adopted petitioner's contentions, and expunged the deficiency. On the Commissioner's appeal, the Circuit Court of Appeals reversed. Petitioner sought certiorari.


Did the Circuit Court of Appeals err in its reversal?




On certiorari, the Supreme Court of the United States sought to determine the gain or loss applying proper interpretation and construction. Explaining that the first step was to determine the basis of the property, the Court found the basis to be the value of the property undiminished by mortgages under I.R.C. § 113 (a) (5) (1938). Second, the Court examined whether depreciation adjustments were proper under § 113 (b) (1) (B) (1938). Third, the Court looked at the amount realized on the sale of the bequeathed property. Section 111 (b) defined "amount realized" from "the sale of property" as "the sum of any money received plus the fair market value of the property," not its equity. The Court concluded that the Commissioner was right in determining that petitioner realized $ 257,500 on the sale of this property. The Court affirmed the judgment by which the appellate court found that the tax court's use of equity as a basis was improper.

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