The opinion
Oppek, /., concurring: In Detroit Edison Co. v. Commissioner, 319 U. S. 98 , depreciation deductions were denied on the ground that the taxpayer had no basis. The circumstances under which it had acquired the property seem to me indistinguishable from those present here. There, as here, the taxpayer had no cost. It was assumed that the only way a basis could be achieved was by treating the acquisition as a gift, thereby conferring the basis of the transferor. This theory the Supreme Court refused to adopt.
Speaking of the treatment of the acquisitions from the standpoint of taxable income, all that is clear is that they had not been taxed or reported, presumably on the authority of Edwards v. Cuba Railroad, 268 U. S. 628 . Detroit Edison takes no position as to the correctness of that treatment, and I agree with the present Opinion that we are free to decide tere that the value of the contributions constituted income taxable to petitioner in that it was not a gift, Detroit Edison Co. v. Commissioner, supra, nor a contribution to capital. Cf. Brown Shoe Co. v. Commissioner, 339 U. S. 583 .
But under the Detroit Edison dictum there are only two possibilities. The first is that the contributions never were taxable income and in that event, of course, the present result would be incorrect. The second possibility is that although they should have been reported as taxable income, they failed to attain a basis for depreciation because they had never been taken up in the taxpayer’s income. Theoretically where, as in Detroit Edison and here, only cost can furnish a basis, the basis would be zero where there is no actual cost. Hebvering v. Gowran, 302 U. S. 238 . But where the subject matter has been taken up in income, courts have thought it equitable to attribute a basis to that extent. Maurice P. O'Meara, 8 T. C. 622 . See Artis C. Bryan, 16 T. C. 972 ; Johnson v. Commissioner, (C. A. 5) 162 F. 2d 844 . 1
The difficulty with the second hypothesis is that less than 3 months after the Detroit Edison opinion was handed down, the Second Circuit held that a taxpayer could take a deduction for a loss on property which should have been but never was reported for tax purposes, even though there was no’ cost or other statutory basis. Bennet v. Helvering, (C. A. 2) 137 F. 2d 537 . This result was reached without any reference to Ruth B. Rains, 38 B. T. A. 1189, upon which the Opinion below had been grounded. The Rains case was itself merely the culmination of a long line of similar results. 2
Basis for gain or loss and basis for depreciation being for all practical purposes identical — with adjustments and exceptions not here pertinent, secs. 118 and 114, I. R. C. 1939; Johnson v. Commissioner, supra — the reasoning of the Bennet case would mean that Detroit Edison must inferentially have decided that the contributions involved there had never been properly reportable as taxable income. In other words, if the Bennet result is right, the present conclusion must be wrong.
But since I think the theory of the Bennet case cannot be supported, 3 I agree with this result.
On the other hand it is said that if she had returned the gain in 1929 and paid taxes on it, the fair value thus capitalized into the property would have been recognized as a proper basis in fixing the gain on the sale in 1938.
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Since the value was not then or since taken into the tax account as a capital investment, there is no occasion to add it to the basis of the property when sold to avoid taxing it a second time. Justice has been done. * * * [Johnson v. Commissioner, supra, at p. 846.]
The cases last above cited [Pearl A. Long, 35 B. T. A. 479 ; affd. 96 F. 2d 270 ; George N. Crouse, 26 B. T. A. 477 ; Searles Real Estate Trust, 25 B. T. A. 1115; Henry V. Poor, 11 B. T. A. 781; affd. 30 F. 2d 1019 ; Bothwell v. Commissioner, 77 F. 2d 35 ; Larkin v. United States, 78 F. 2d 951 ] are predicated upon the general principle that a taxpayer can not take as a deduction the loss of a gain which has not been reflected in income. For example, in the Poor case, supra, the taxpayer deducted from gross income as a bad debt the full amount of a judgment embracing 8484.21 interest which had at no time been Included in his reported income. The Board applied the principle stated, notwithstanding the taxpayer kept his books on a cash receipts and disbursements basis, and the uncollected interest, therefore, was properly excluded from his gross income.
In the instant case, petitioner is not seeking to deduct directly from gross income the amount of the uncollected royalties, and if such a deduction were claimed, it would not be allowable under the doctrine referred to. However, petitioner is attempting to attain the same result by including the amount of the royalties in the basis to be deducted in computing gain or loss * * *
Substantially the same principle has been applied and the same results obtained in analogous situations based upon slightly different reasoning. In William Merriam Crane, 27 B. T. A. 360; affd., 68 Fed. (2d) 640, the petitioner owned certain realty which had been leased to an insurance company. The lessee made improvements of substantial value in 1920 which were to revert to the lessor upon termination of the lease. Petitioner sold the property in 1927, and contended that in computing gain or loss on the sale he was entitled to deduct the depreciated cost of the improvements, although he had never reported any part of such cost or value in his income. We denied the deduction on the ground that an income item is not, for tax purposes, converted into a capital asset, having a cost basis, until it is first taken into income. * « *
In Commissioner v. Farren, 82 Fed. (2d) 141, the taxpayers in 1918 each received shares of stock in an oil company as compensation for services rendered. Although taxable as income for 1918, no return was made for that year, on the theory that no income was derived until the stock was sold. The stock was sold in 1926, and the taxpayers contended they were entitled to deduct the value, of the stock when acquired, notwithstanding such value had not been returned as income. The deduction was disallowed.
In Long v. Commissioner, 96 Fed. (2d) 270, affirming 35 B. T. A. 479, the court held that the worthless obligation of a husband to pay alimony was not deductible as a bad debt, since there was no cost basis of the debt sought to be deducted.
In Alamo National Bank of San Antonio, Executor, 36 B. T. A. 402; affd., 95 Fed. (2d) 622, the petitioners were the sole stockholders of a corporation from which they received a Coca-Cola franchise in 1921 as a liquidating dividend, but did not include in their income for that year any amount on account of the receipt of the franchise. They sold the franchise in 1931, and we held they were not entitled to deduct any value for the franchise as a basis for computing gain from its sale. [Ruth B. Rains, supra, at pp. 1196, 1197.)
See footnote 2, supra.