Crane v. Commissioner of Internal Revenue

• Citation: 68 F.2d 640
• Decision Date: 09 January 1934
• Docket Number: No. 2836.,2836.
• Parties: CRANE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

68 F.2d 640 (1934)

CRANE v. COMMISSIONER OF INTERNAL REVENUE.

No. 2836.

Circuit Court of Appeals, First Circuit.

January 9, 1934.

James M. Rosenthal, of Pittsfield, Mass. (Joseph M. McMahon, of Pittsfield, Mass., on the brief), for Crane.

Carlton Fox, Sp. Asst. to Atty. Gen. (Pat Malloy, Asst. Atty. Gen., and Sewall Key and J. Louis Monarch, Sp. Assts. to Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before WILSON and MORTON, Circuit Judges, and McLELLAN, District Judge.

McLELLAN, District Judge.

This is a petition for review of a decision of the United States Board of Tax Appeals redetermining a deficiency in income taxes for the calendar year 1927. The controversy before the Board of Tax Appeals concerned the propriety of the refusal by the Commissioner of Internal Revenue to permit the petitioner to add to the cost basis of certain real estate sold by him in 1927 the depreciated value of improvements made by a lessee.

In 1910 the petitioner for review inherited from his father a lot of land with the building thereon, located in New York City. It was stipulated that on March 1, 1913, the value of the land and building was $115,000, of which $104,000 was the value of the land and $11,000 the value of the building. On January 6, 1920, the petitioner leased the land and building to the American Mutual Liability Insurance Company for the term of ten years, and, in accordance with the terms of the lease, improvements were made by the lessee during the year 1920 in the amount of $95,182, which were to revert to the lessor upon the termination of the lease. According to the stipulation, no part of the cost of the improvements made by the lessee was reported by the petitioner as taxable income. In 1927 the petitioner sold the land and building for $175,125, subject to the lease.

In his petition for a redetermination of the deficiency set forth by the Commissioner of Internal Revenue in his notice of deficiency, the petitioner alleged that he inadvertently failed to report as income for any year the depreciated value of the improvements made by the lessee, and the Commissioner's answer admitted this.

In computing gain or loss upon the sale of the property in 1927, the petitioner added to his March 1, 1913, cost basis the depreciated value of the improvements. The Commissioner recomputed the gain or loss without making any allowance for such depreciated value of improvements. The United States Board of Tax Appeals affirmed this action by the Commissioner of Internal Revenue, and the question for decision is whether, in the computation of gain or loss upon the sale of the property in question, the March 1, 1913, value should be used, and not that value plus the depreciated value of improvements made by the lessee.

The rights of the parties are determined by section 202 (a) and (b) and section 204 (b) of the Revenue Act of 1926, 26 USCA §§ 933 (a, b), 935 (b), as interpreted by Regulations 69, article 1561, the pertinent provisions whereof follow:

"Sec. 202. (a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204 section 935 of this title, and the loss shall be the excess of such basis over the amount realized.

"(b) In computing the amount of gain or loss under subdivision (a) —

"(1) Proper adjustment shall be made for any expenditure or item of loss properly chargeable to capital account, and

"(2) The basis shall be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property been allowable in respect of such property under this title or prior income tax laws; but in no case shall the amount of the diminution in respect of depletion exceed a depletion deduction computed without reference to discovery value or to paragraph (2) of subdivision (c) of section 204 section 935 of this title. In addition, if the property was acquired before March 1, 1918, the basis (if other than the fair market value as of March 1, 1913) shall be diminished in the amount of exhaustion, wear and tear, obsolescence, and depletion actually sustained before such date."

"Sec. 204. (b) The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be * * * (B) the fair market value of such property as of March 1, 1913. * * *"

"Regulations 69, Art. 1561. * * * In computing the amount of gain or loss, however, the cost or other basis of the property must be increased by the cost of capital improvements and betterments made to the property since the basic date. * * *"

The respondent urges that since the statute was designed to...