Court Opinion

ID: 4498908
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:11.632737+00
Date Added: 2024-06-11T14:54:16.701336
License: Public Domain

Mukdock,
dissenting: Interest and taxes are deductible annually under section 23. The law is well settled that carrying charges, such as interest and taxes on unproductive property, are not properly chargeable to capital account. However, section 113 (b) (1) (A) of the Revenue Act of 1932 and corresponding provisions of subsequent acts, as interpreted by the Commissioner (see I. T. 2664, XI-2 C. B. 43, and I. T. 2102, XII-2 C. B. 16), allow the owner of unproductive real estate an alternative method of recovering such carrying charges tax free. If the taxpayer does not care to deduct them annually under section 23, he may charge these items to capital account, thus increasing his basis for gain or loss on the property, and recover the items tax free as a lump sum adjustment upon the disposition of the property in accordance with this new. provision. These carrying charges may be recovered in this way solely because of the statutory provision, not because they are now properly chargeable to a capital account from an accounting standpoint.
The Commissioner, in his interpretation of the statute, has used a peculiar phrase, “interest on real property.” This must mean interest on an obligation encumbering the real property. The interest on any mortgage on the property would answer this description. The economist recognizes that property is carried by whatever investment there is in it, regardless of whether the investment is entirely in cash or is partly represented by a mortgage. Cf. Fraser v. Commissioner, 25 Fed. (2d) 653; Westerfield v. Rafferty, 4 Fed. (2d) 590. Some of the carrying charges simply become crystalized in the form of interest when a mortgage is put on the property. I see no danger in giving the owner this choice of method for recovering interest on *1224any mortgage on the property. Ordinarily, the difficulty of borrowing money on real estate mortgages would limit the amount of the borrowings to substantially less than the value of the property. Congress and the Commissioner were apparently content to allow the alternative method of recovering interest on any mortgage on unproductive real estate.
The prevailing opinion makes the right to the alternative method depend upon the necessity for the loan and the use to which the money is put. I see nothing to justify this in the statute, in the interpretation placed upon it by the Commissioner, or in the subject generally. It invites litigation by imposing a difficult and sometimes insurmountable burden of proof. It introduces a distinction which is unsound from the standpoint of economics. It may be necessary for one man to borrow nothing in the purchase of unproductive real estate while another may have to borrow a great deal. If they both borrowed the same amount, why should Congress want to treat them differently and who could determine the extent to which the borrowing was necessary? The man who originally gives a mortgage for a part of the purchase price may do so because he wants to use his own money for some other purpose and not because of necessity. A subsequent borrowing to pay taxes and interest may have no greater necessity. Interest on any amount which an owner can borrow on unproductive property is, in fact, a part of the cost of carrying that property. The owner can limit the interest by using cash to buy and carry the property, but he does not thereby reduce his expense of carrying the property. It is only a question of whether he loses the use of his own money or pays someone interest for the use of their money. The alternative method should not depend upon the necessity for borrowing money on the property or the immediate use to which money borrowed on the property is put.
Leech agrees with this dissent.