Crane v. Commissioner

1947-04-14

Headline: Inheritance tax ruling: Court affirms that when a person inherits a mortgaged building and later sells it still subject to the mortgage, the mortgage amount counts toward sale proceeds, increasing taxable gain.

Holding: In cases of inherited, mortgaged property sold still subject to the mortgage, the heir’s basis is the full property value and the mortgage principal counts toward the amount realized on sale.

Real World Impact:

Counts mortgage principal as part of seller’s amount realized when property sold subject to mortgage.
Allows depreciation based on full property value, not just the inherited equity.
Raises taxable gain for heirs or executors who sell mortgaged property.

Topics: selling inherited property, mortgages and debt, taxable gain calculation, depreciation on buildings

Summary

Background

A widow who inherited an apartment building subject to a mortgage operated the building for nearly seven years, reported rents as income, and claimed deductions including depreciation. The property had been appraised for estate tax purposes at the full value undiminished by the mortgage. In 1938 she sold the property subject to the mortgage for $3,000 cash, paid $500 selling expenses, and reported a small taxable gain based only on the cash she received.

Reasoning

The core question was what the words "property" and "amount realized" mean for computing taxable gain when inherited property is sold subject to an unassumed mortgage. The Court looked to ordinary meanings, long-standing Treasury regulations, and the practical effects on depreciation accounting. It held that the basis at inheritance is the full fair market value of the property undiminished by liens, that depreciation deductions are allowable against that basis, and that the mortgage principal assumed by the buyer counts as part of the seller’s amount realized. Applying those rules, the Court upheld the Commissioner’s figure that the seller realized $257,500 on the sale.

Real world impact

The decision means heirs, executors, and other owners who inherit mortgaged real estate must treat the full property value as their basis and must include mortgage principal in sale proceeds when selling subject to the mortgage. That increases taxable gain in many cases and confirms the Treasury practice of allowing depreciation on the full property value.

Dissents or concurrances

Justice Jackson (joined by Frankfurter and Douglas) dissented, arguing the Tax Court reasonably found the heir acquired only a zero-valued equity and was not personally liable on the debt, so the Tax Court’s valuation should have been sustained.