Helvering v. Bruun
309 U.S. 461 (1940)

  • Bruun was a landlord. He leased some property to a tenant. When the lease expired, the tenant left and Bruun took the property back.
    • While the tenant was in possession of the property, they knocked down an old building and built a new building on the property. When they left, Bruun got to keep the new building.
      • The new building was assessed to be worth $51k more than the old one.
  • The IRS stepped in and said that Bruun's gain of a new building was a capital gain.
    • Bruun argued that no income had been realized yet because his interest was represented by a deed, and when the tenant left, he had the exact same deed he had when the tenant arrived. So he hadn't gained anything. Bruun suggested that the IRS would have to wait until the property was sold (aka the value was realized).
      • Basically, the construction of the new building increased the value of the land, but there were other ways the value could change. But until the land was sold, Bruun hadn't received anything.
      • See Eisner v. Macomber (252 U.S. 189 (1920)), which says that in general, you don't have to report a gain until you sell the property (aka "severance is a prerequisite to realization").
    • The IRS argued that until the day the tenant left, Bruun didn't own a new building, as soon as the lease ended, Bruun did own a new building. He had received a gain and needed to pay taxes on it immediately.
  • The US Supreme Court found for the IRS.
    • The US Supreme Court found that upon when a lease ended, the landlord repossessed the real estate and improvements and increase in value attributable to the improvements was taxable.
  • The real estate industry felt that this was very unfair to landlords. If the new building was expensive, the landlord might be forced to sell the land just to be able to afford the tax. They lobbied Congress, who passed 26 U.S. C. 109 was to provide relief for exactly landlord's in Bruun's situation.
    • Now, under 109, gross income generally does not include improvements made by a tenant.
    • However, it does not include "improvements other than rent." That clause was added so the landlord and tenant couldn't conspire to improve the property instead of paying rent.
      • So you can't say to a tenant, "instead of paying me rent, just build a fancy new building that I can keep after you leave."