Lang v. Commissioner
Headline: Court upheld tax ruling that a surviving spouse cannot treat tenancy-by-entirety property as newly inherited, forcing use of original purchase cost to calculate gain when that property is later sold.
Holding:
- Surviving spouses owning tenancy-by-entirety property cannot use a stepped-up basis from the spouse's death.
- Forces sellers to use original purchase cost, possibly increasing reported capital gains tax.
- Applies unless Congress changes the tax law to treat such interests differently.
Summary
Background
A married couple bought a piece of real estate in 1915 for $13,000. The wife contributed $1,560 (12%) and the husband paid the rest. The husband died in 1924 when the property’s market value was $40,000; 88% of that value was included in the husband’s gross estate for estate tax purposes. The property was sold in 1925 for $40,000. The wife reported her gain using the 1924 market value for the husband’s share, minus her 12% contribution, but the Commissioner used the entire 1915 cost to compute the gain. The Board of Tax Appeals and the court below agreed with the Commissioner.
Reasoning
The Court focused on the language of §204(a)(5) of the Revenue Act of 1926, which says the cost basis applies generally, except when property was acquired by bequest, devise, or inheritance, in which case the basis is its fair market value at acquisition. The Court explained that a tenancy by the entirety is a single ownership shared by husband and wife, so when one spouse dies the survivor does not “acquire” the property by inheritance. The Court also noted that Congress had expressly included joint and entirety interests for estate-tax valuation in other provisions but omitted them from the provision that creates a stepped-up basis, which suggests Congress did not intend a stepped-up basis for such holdings. The Court distinguished prior decisions and said Congress, not the courts, should change any unfairness.
Real world impact
The decision means surviving spouses who hold property as tenants by the entirety cannot treat the property as newly inherited for tax basis purposes; gains on later sales are measured from the original purchase cost unless Congress amends the law. The judgment of the lower court was affirmed.
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