Crane v. Commissioner
331 U.S. 1 (1947)

  • Ms. Crane inherited all her husband's property when he died. Unfortunately for Ms. Crane, she also inherited all of his debt.
    • Mr. Crane owned a building that had a $255k mortgage on it, plus $7k in interest.
      • It was a non-recourse obligation, which means that if Ms. Crane didn't pay, they could take the building back, but they couldn't go after any of Ms. Crane's other assets.
    • The building was assessed to be worth exactly the amount of the mortgage, so in a way you could argue that Ms. Crane acquired $0. She got $262k of building and also $262k of debt to go with it.
  • Ms. Crane couldn't keep up with the payments, and eventually sold the building for the price of the mortgage plus $2500.
  • Ms. Crane reported the $2500 on her taxes (half as gross income and half as capital gains but don't worry about that). The IRS claimed that Ms. Crane owed a lot more than that.
    • The IRS argued that while the building was originally worth $262k there had been depreciation (and Ms. Crane had taken credit for that depreciation on her taxes), so when Ms. Crane sold it, the building had lost $28k of value, so Ms. Crane really made a gain of about $30k.
  • The Tax Court found for Ms. Crane. The IRS appealed.
    • The Tax Court found that what Ms. Crane had inherited was equity, which is the difference in value of the land and building in excess of the value of the mortgage. That was $0.
  • The Appellate Court reversed. Ms. Crane appealed.
    • The Appellate Court found that Ms. Crane didn't inherit equity, she inherited property. When the property was sold, she received income equal to the amount of debt assumed by the purchaser that was in excess of the value of the building and land.
  • The US Supreme Court affirmed and found for the IRS.
    • The US Supreme Court agreed with the IRS that what Ms. Crane inherited was property and not equity.
    • The Court found that when Ms. Crane sold the house, she made a gain because she sold the property for more than it was worth.
      • So Ms. Crane made a profit even though she didn't actually get any of the money.
  • When Ms. Crane previously calculated depreciation on her taxes, she basically had said that she lost $28k of value on the property (because she only counted the fair market value of the property in the calculations, not her equity (which was $0)). So it was inconsistent for her to later say that she had no equity in the property.
  • This case stands for the idea that non-recourse liability will occupy the same posture for tax purposes as full recourse liability does.
    • Basically, a taxpayer is treated as having realized proceeds from the elimination of a debt even if that taxpayer had no personal liability for the debt.