CRANE V. COMMISSIONER
331 U.S. 1 (1947)
NATURE OF THE CASE: This was a dispute over taxable gains on depreciable property on a
mortgage that was not assumed. This was an appeal challenging a decision which reversed the
holding of the Tax Court, which expunged part of a deficiency determined by the IRS.
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.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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