331 U.S. 1, 67 S. Ct. 1047, 91 L. Ed. 1301 (1947)
Crane was the sole beneficiary and the executrix of the will of her husband, who died January 11, 1932.1 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.2
Shortly after her husband's death, Crane 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.3 This plan was followed for nearly seven years, during which period Crane 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.4 Meanwhile, the arrearage of interest increased to $15,857.71.5
On November 29, 1938, with the mortgagee threatening foreclosure, Crane sold to a third party for $3,000.00 cash, subject to the mortgage, and paid $500.00 expenses of sale.6
Crane reported a taxable gain of $1,250.00 on the theory that the property acquired and sold was only the equity with a zero basis, so that the amount realized was the net cash of $2,500.00.7 The Commissioner determined that Crane realized a net taxable gain of $23,767.03 on the theory that the property was the physical property itself with an original basis of $262,042.50, adjusted for $28,045.10 in depreciation, and that the amount realized included the $255,000.00 mortgage principal.8
The Tax Court agreed with the Commissioner that the building was not a capital asset but otherwise adopted Crane's contentions and expunged the deficiency.9 On the Commissioner's appeal, the Circuit Court of Appeals reversed.10 The Supreme Court granted certiorari because of the importance of the questions raised as to the proper construction of the gain and loss provisions of the Internal Revenue Code.11
Whether the term 'property' in the basis provisions refers to the full value of the land and building or only the taxpayer's equity?12
Under sections 111 and 113 of the Revenue Act of 1938, the basis of property acquired by devise is the fair market value of such property at the time of acquisition, and the term property is interpreted in its ordinary sense to mean the physical asset or the aggregate of the owner's rights to control and dispose of it, undiminished by any mortgage.13
Yes. Crane acquired the apartment building and lot by devise upon her husband's death on January 11, 1932. The property was appraised at exactly $262,042.50 for federal estate tax purposes, a figure equal to the mortgage principal plus accrued interest.14 Crane operated the property for nearly seven years under an agreement with the mortgagee, reporting gross rentals and claiming deductions including for physical exhaustion of the building.15
The ordinary meaning of property, as confirmed by standard dictionary definitions and consistent administrative construction since 1918, encompasses the full rights in the land and building rather than a mere equity of redemption.16 This construction aligns with the statutory scheme for depreciation and gain computation, avoiding the administrative difficulties and double-deduction problems that would arise from an equity-only basis.17
The term property refers to the full value of the land and building.18
Related opinions on this issue
Joined by Justice Frankfurter And Justice Douglas
Justice Jackson maintained that the Tax Court properly found the taxpayer acquired only an equity worth nothing at acquisition because the mortgage was in default and equal to the property's value.19 He reasoned that Crane never became personally liable for the debt, so the mortgage simply subtracted from the value of what she received and sold, leaving her with a property right equivalent to an equity of redemption.20 In his view the Tax Court acted within its province in treating the equity as the property bought and sold under the revenue laws.21
Jackson stressed that arguments treating the taxpayer as receiving the whole property and owing the whole debt were not so conclusive as to displace the Tax Court's factual finding of a zero-value equity.22 The taxpayer never became personally liable for the debt, and hence when she sold she was released from no debt.23
Whether allowable depreciation adjustments must be made to the basis of property held subject to an unassumed mortgage?24
Section 113(b)(1)(B) requires that proper adjustment be made in all cases for exhaustion, wear and tear to the extent allowed but not less than the amount allowable, using the basis determined under section 113(a) for determining gain or loss.25
Yes. The correct unadjusted basis was the full appraised value of $262,042.50. The parties stipulated a two-percent annual depreciation rate applicable to the building, producing an allowable adjustment of $28,045.10 over the holding period.26 Crane had in fact claimed and been allowed deductions for physical exhaustion during the nearly seven years she operated the property.27 Because the basis is the full value of the building rather than zero equity, the statute mandates the adjustment regardless of the unassumed mortgage.28
The Tax Court erred in concluding that no depreciation could be taken on a zero basis.29
Allowable depreciation adjustments must be made to the basis of property held subject to an unassumed mortgage.30
Whether the amount realized on the sale of property subject to a mortgage includes the principal amount of the mortgage?31
Section 111(b) defines the amount realized from the sale or other disposition of property as the sum of any money received plus the fair market value of the property other than money received. This amount includes the principal of a mortgage subject to which the property is transferred when the seller receives boot.32
Yes. Crane sold the property for $3,000 cash subject to the mortgage and paid $500 in sale expenses, netting $2,500 cash while the principal amount of the mortgage stood at $255,000, producing a total amount realized of $257,500.33 Although Crane was not personally liable on the mortgage, the transfer subject to the mortgage while receiving cash boot conferred a real and substantial benefit equivalent to the mortgage principal.34 This treatment is required to maintain consistency with the full-value basis used for acquisition and depreciation and to prevent the taxpayer from excluding allowable deductions when computing gain.35
The amount realized on the sale of property subject to a mortgage includes the principal amount of the mortgage.36
Related opinions on this issue
Joined by Justice Frankfurter And Justice Douglas
Justice Jackson concluded that when Crane sold she transferred only the equity and received release from no debt because she had never been personally liable.37 He viewed the mortgage debt as a subtraction from the value of what she sold, leaving only the small cash margin actually received.38 In his judgment the Tax Court correctly determined that the amount realized did not include the mortgage principal.39
Jackson noted that the mortgage debt was simply a subtraction from the value of what she did receive and from what she sold.40 The subtraction left her nothing when she acquired it and a small margin when she sold it.41 The taxpayer acquired a property right equivalent to an equity of redemption and sold the same thing.42
Whether the Tax Court's determinations on the meaning of property and the amount realized were subject to review by the Circuit Court of Appeals?43
Determinations by the Tax Court that announce rules of general applicability on clear-cut questions of law are subject to review by the Circuit Court of Appeals under section 1141 of the Internal Revenue Code.44
Yes. The Tax Court ruled that property means equity and that the mortgage amount is not included in the amount realized. These holdings announced rules of general applicability on clear-cut questions of law rather than merely resolving factual disputes peculiar to the case.45 The Circuit Court of Appeals therefore possessed jurisdiction to review and reverse those legal determinations.46
The Tax Court's determinations on the meaning of property and the amount realized were subject to review by the Circuit Court of Appeals.47