Crane v. Commissioner

331 U.S. 1 (1947)

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Nature of the Case

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Facts

P inherited an apartment building as the sole beneficiary and executrix of her husband's will who died in 1932. The apartment building was subject to a mortgage which secured a principal debt of $255,000 and interest in default of $7,042.50. The property was appraised for federal estate tax purposes at a value exactly equal to the total amount of the encumbrance. P then entered into an agreement with the mortgagee to continue the business reserving $200 per month for taxes and to turn over all net rentals to the mortgagee. This continued for seven years. The arrearage of interest increased to $15,857.71. During this time P reported the gross rentals as income and claimed and was allowed deductions for taxes and operating expenses on the property, for interest paid on the mortgage and for the physical exhaustion of the building. Threatened with foreclosures, P sold the property for $3,000 cash, subject to the mortgage and paid $500 expenses of the sale. P reported a taxable gain of $1,250. The IRS determined that she got a taxable gain of $23,767.03. The IRS determined that the original basis was $262,042.50; its appraised value as of 1932. Of this value, $55,000 was allocable to the land and $207,042.50 was to the building. During the period of the years that P operated the building, P depreciated $28,045.10 on the building so is adjusted basis was $178,997.40. The amount realized on the sale was said to include not only the $2,500 net cash receipts but also the principal amount of the mortgage subject to which the property was sold both totaling $257,500. The Tax Court ruled for P and expunged the deficiency. The Court of Appeals reversed.