Crane v. Commissioner of Internal Revenue Case - Essay Example

She was also expected to reserve $ 200.00 every month for taxes and pay-- collecting the rent, and paying for the net rentals towards the mortgage debt. However, On November 29, 1938, the mortgagee threatened foreclosure of the property after the reorganization of the interest grew to $ 15,857.71. Mrs. Crane, therefore, decided to sell it to a third party for $ 3,000.00 cash and paid $ 500.00 expenses of sale. She reported a taxable increment of $ 1,250.00. She argued that her property acquired from 1932-1938 was only equity. She claimed that the equity was of zero worth when she acquired it. No depreciation could be taken on a zero value. Secondly, neither she nor her vendee ever assumed the debt; therefore, upon selling the equity, the amount she realized on the sale was $ 2,500.00. Nonetheless, the Commissioner determined that the petitioner realized a net taxable gain of $ 23,767.03. He argued that, in addition to the net cash accounted by the petitioner, the amount realized should also contain the standard amount of the mortgage of $250,000 when sold.

Issues: First, how the gain or loss on the sale of a physical property acquired by the bequest subject is determined? Secondly, how the amount realized on the sale of a physical property is calculated, and lastly, whether there are any depreciation allowances from the value of a property at the time of gaining.

Analysis: The tax court first established the selling price comprised of the land and the building although the building is not a “capital asset”. The whole gain should, therefore, be taxed after the adjustments of the property where and tear has been made, under §113 (a).

For the first question, the court determined that, under section § 113 (a) (5), an unadjusted basis for determining loss or gain on the sale of a physical property. Mrs. Crane should determine her property value undiminished by the amount of the mortgage.

In the second question, under § 111 (b), the "amount realized" is calculated as the amount of the cash realized in addition to the amount of the mortgage. It is regardless of whether or not she had acquired the property subject to the mortgage.

In the third question, under § 113 (b) (1) (B), Mrs. Crane is entitled to deductions for the building depreciation. The fact that she sold the property for an amount slightly higher than her mortgage value does not deny her the allowances. In addition, such deductions should be included when she is determining her property loss or gain.

Conclusion: Since the statute acknowledges building depreciation allowances, Mrs. Crane was granted the allowances. It was also determined that she never became individually accountable for the debt, and therefore, when she ended the property, she was freed from no debt. The mortgage debt was a deduction from the value of what she received, and from what she sold.

[Historical note: The huge influence of the Crane case appeared upon Congress’s presentation of the accelerated depreciation rules (ACRS) under the Economic Recovery Tax Act of 1981. It allowed depreciation over a much more compacted duration than it did in the past].