Commissioner of Internal Rev. v. Appleby's Estate
| Decision Date | 01 December 1941 |
| Docket Number | 72.,No. 71,71 |
| Citation | 123 F.2d 700 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. APPLEBY'S ESTATE et al. SAME v. APPLEBY. |
| Court | U.S. Court of Appeals — Second Circuit |
Samuel O. Clark, Jr., Asst. Atty. Gen., and Helen R. Carloss and Harry Marselli, Sp. Assts. to the Atty. Gen., for petitioner.
John B. Coman, of New York City (Cuthell, Appleby, Osterhout & Mills, of New York City, of counsel), for respondent Edgar S. Appleby's Estate.
Banton Moore, of New York City (Townsend L. Cannon, of New York City, of counsel), for respondent John S. Appleby.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
These consolidated petitions involve the 1934 income tax liability of two brothers who acquired by devise under their father's will, on December 15, 1913, a tract of land which the city of New York condemned in 1933 and paid for in 1934. This resulted in a profit to each of the taxpayers. The amount thereof is the matter in dispute. Two questions are presented: (1) Whether the increment of $67,573.95 added to the condemnation award by reason of the lapse of time between the taking of the property in January, 1933, and the payment therefor in October, 1934, should be considered as capital gain or normal income; and (2) whether the cost basis of the improvements taken in condemnation should include the value of structures demolished in 1917 to make way for the erection of the building condemned. The first question is common to both of the cases on appeal; the second affects only the tax of John S. Appleby.
In holding that the increment to the award must be treated as capital gain rather than normal income, although denominated "interest", the Board followed the decision of this court in Seaside Improvement Co. v. Commissioner, 105 F.2d 990. The authorities which lead to that conclusion are there discussed, and we still feel constrained to follow them, though if the matter were tabula rasa not all of the court as now constituted would reach that conclusion. We pass therefore to the second question.
When the property was acquired by the taxpayers in 1913 it was improved with structures having a value at that time of $14,000. These buildings yielded an inadequate return and in 1917 they were torn down to make way for the erection of a garage, for which prospective tenants had been found. The garage was completed in 1918 and was taken in condemnation in 1933. The Board held, sustaining the position of the taxpayers, that the depreciated value of the structures demolished in 1917 should be added to the cost basis of the garage, since the cost of demolition was a necessary incident in the cost of the new building.
The commissioner contends that the Board's decision disregards the applicable provisions of the treasury regulations promulgated under the Revenue Act of 1916 and carried forward in substantially the same form in the later regulations, including those applicable to the year 1934. See Arts. 155 and 156, Reg. 33; Art. 142, Regs. 45, 62, 65 and 69; Art. 172, Reg. 77; Art. 23(e)-2, Reg. 86. He argues that pursuant to these provisions, which have the force of law, the taxpayer would have been permitted to deduct from his 1917 gross income the loss sustained by demolition of the old buildings, and is forbidden to add it to the cost basis of the new building. Although the regulations appear at first blush to favor the commissioner's position, we are convinced that neither branch of his argument is sound.
It is true that Article 155 of Regulations 33 declares that "loss due to voluntary removal or demolition of old buildings * * * will be deductible from gross income * * *." But this language cannot be read so broadly as to permit deductions not recognized by the statute. Subdivisions fourth and fifth of section 5(a) of the Revenue Act of 1916, 39 Stat. 759, are the only provisions which can be thought to authorize deduction of a loss resulting from voluntary demolition of old buildings; but the former is restricted to losses incurred in the taxpayer's...
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