Court Opinion

ID: 4483619
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:12.235235+00
Date Added: 2024-06-11T07:58:22.350300
License: Public Domain

Hill /., dissenting: I can not agree with the conclusion of the majority opinion that the 1929 fair market value of the building is not includible in petitioner’s basis for computing gain or loss on the sale. In my view, the conclusion rests upon an incorrect interpretation of section 113 of the Revenue Act of 1938. The majority conclude that the building is not a part of petitioner’s cost basis because she did not pay for its construction. I think such a conclusion incorrectly narrows the scope of section 113 (a), for its effect is to restrict “cost” to payments for the acquisition or original construction of the asset. The proper test is, what is the taxpayer’s original investment in the property? I think it is abundantly clear that such a test will properly include items which the majority view, if consistently applied, would exclude. Section 113 (b) (1) (A), unmentioned in the majority opinion, is designed to reflect the taxpayer’s final unrecovered investment in the property. The effect of these two provisions of the 1938 Act1 is to constitute a positive mandate that the taxpayer’s net investment in the asset disposed of is not to be taxed. The statute expressly recognizes that, if his books are correctly kept, the taxpayer’s capital account with respect to the asset will reflect the amount of that investment. Though it was by no means clear in 1929, it is now settled by Helvering v. Bruun, 309 U. S. 461, that petitioner realized taxable income when she reacquired the property in the amount of the then fair market value of the building. She did not report this income, but she realized it, even though the building was inseverably affixed to her original capital asset, the land. If such income had been received by her in the form of cash or separately disposable property which she converted into cash, and if the money were used to erect a building on the land, then there would be no question but that the amount would properly have been chargeable to petitioner’s capital account in respect of the property. It would be conceded that her income had been invested therein and that the inclusion in basis is proper, and in my view this would be true whether or not the income had been taxed when it was received, for I can not find in either section 113 (a) or in section 113 (b) (1) (A) any basis for a conclusion that their application is dependent upon the taxpayer’s compliance with income provisions of the statute. The situation here is exactly the same as the end result there. The single factual distinction is that the inflexible form of petitioner’s income eliminated her normal freedom of choice as to its disposition. She did not have the privilege of deciding whether to invest her income in a building, for it had already been dedicated to that purpose and the dedication could not be undone. The value of the building should, under the Brwm case, have been recorded on petitioner’s books as income in 1929 and so reported on her income tax return for that year, but it can not be denied that the proper accounting practice would have been immediately to credit that same amount to her capital account as representing her income which was invested in her property. In interpreting “cost” the majority have relied solely and squarely upon Detroit Edison Co. v. Commissioner, supra. In that case, however, and in each of the other cases cited by the majority, the courts went no further than to say that the meaning there ascribed to “cost” was normally correct and was correct as applied to the, facts then under consideration. But none of those cases presented the exact question which is here before us and which was raised in Greenwood Packing Plant v. Commissioner, 131 Fed. (2d) 787, and in Crane v. Commissioner, 68 Fed. (2d) 640. The Detroit Edison case is distinguishable on the fundamental ground that none of the taxpayer’s income was invested in the improvements sought to be depreciated. This factual contrast becomes more vivid when it is noted that in all of these basis cases the ultimate object of the inquiry is to determine the taxpayer’s net investment in the asset. Detroit Edison Co. v. Commissioner, supra, at page 103. But compare the situation in Bueltermann v. United States, 155 Fed. (2d) 597 (C. C. A., 8th Cir.). No addition to Detroit Edison’s actual out-of-pocket cost was necessary, as it is to the cost of petitioner’s land, to make the basis represent the owner’s total investment in the property. The majority, after determining that the building “cost” petitioner nothing, find it unnecessary to consider the significance of the fact that it represented taxable income to petitioner in 1929. Perhaps they do so because respondent, by his established practice, see article 22 (a)-13, Regulations 74, 86, 94, and 101, by concession on brief, and by implication in the explanatory letter accompanying the deficiency notice, makes it clear that petitioner’s position would not have been challenged if she had reported such income on her 1929 tax return. I think that such a distinction in result is demonstrably unsound, and that the majority opinion would have been further weakened if the decision were based even in part on petitioner’s 1929 delinquency. But the administrative view does have the merit of preventing double taxation of a lessor’s economic gain by virtue of repossession of the leased property. As I understand it, however, the reasoning of the majority opinion would require that the gain be taxed on disposition of the property by the lessor even though under the Braun case it had been taxed at the time of repossession, for the “cost” of the property to the taxpayer would hardly be increased by the amount on which he is taxable simply because he has paid the tax. I do not believe that such an inequitable result was intended by Congress or is called for by the statute. In case it may be said, however, that the decision here is justifiable on the facts because no inequity is done the petitioner, let us consider the equitable argument which the respondent advanced but upon which the majority declined to reply. The taxpayer’s failure to report the value of the lessee’s improvements as taxable income in the year of repossession was the basis for the decision of this identical question in Crane v. Commissioner, supra, decided also in favor of the Government by the First Circuit Court of Appeals six years prior to the Brmm decision. The premise is that petitioner’s failure to report as income any value for the building was either a declaration that it had no value or an election to postpone realization of income therefrom until the property was sold, and the conclusion therefrom is that “a duty of consistency” prevents petitioner frqm now contending either that it then had a value or that income was realized by her prior to sale of the property in 1938. The facts no more support a finding here of declaration of no value than in the very similar situation in Helvering v. Salvage, 297 U. S. 106, where the Supreme Court expressly approved the Second Circuit Court’s rejection of that argument. In Greenwood Packing Plant v. Commissioner, supra, the Fourth Circuit Court of Appeals, in dealing with the exact fact situation here presented, pointed out that Burnet v. Sanford & Brooks, 282 U. S. 359, denies that either the taxpayer or the Commissioner has authority to elect the year for the taxing of economic gain and that in this situation the Bruun case fixes the year of taxability as the year of repossession of the property. The court which decided the Crane case refused to apply its reasoning to very similar facts in Countway v. Commissioner, 127 Fed. (2d) 69, and in Commissioner v. Saltonstall, 124 Fed. (2d) 110, and opposite conclusions were reached in both cases. That same view was recently rejected by the Second Circuit also, after a penetrating analysis, in Bennett v. Helvering, 137 Fed. (2d) 537, and again in McCullough v. Commissioner, 153 Fed. (2d) 345, 347. The Seventh Circuit Court followed the Saltonstall case in affirming our decision, 125 Fed. (2d) 365, in American Light & Traction Co., 42 B. T. A. 1121. Helvering v. Williams, 97 Fed. (2d) 810 (C. C. A., 8th Cir.), and United States v. duPont, 47 Fed. Supp. 894 (Dist. Ct., Dist. Del.), likewise repudiate the reasoning of the Crane case. I view the “consistency” argument as simply an excuse for imposing a tax liability which actually has been precluded by the statute of limitations and which may not be asserted under section 3801 of the Internal Revenue Code. Construing the 1938 taxing act so as to reach income which indisputably should have been but may not now be taxed as of 1929 will not only establish a dangerous precedent, but here will undoubtedly cause the petitioner to bear a substantially greater tax liability than she would have had but for an apparently innocent error. So far as the equities are concerned, petitioner is no more responsible for the legal confusion which must be accepted as causing the 1929 error than is the Government. Cf. Hewitt Realty Co. v. Commissioner, 76 Fed. (2d) 880; M. E. Blait & Co. v. United States, 305 U. S. 267, and see discussion in Helvering v. Bruun, supra, at page 465. In my opinion, the majority, resting solely upon a narrow interpretation of the word “cost,” have in effect denied to petitioner the protection to which she is entitled under the statute of limitations. Van Fossan, J., agrees with this dissent.   SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that— **•••*• (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided. (1) General rule. — Proper adjustment in respect of property shall in all cases be made— (A) for expenditures, receipts, losses, or other items, properly chargeable to capital account, including taxes and other carrying charges on unimproved and unproductive real property, but no such adjustment shall be made for taxes or other carrying charges for which deductions have been taken by the taxpayer in determining net Income for the taxable year or prior taxable years. [[Image here]]