Estate of Levine v. Commissioner

In 1944, a corporation owned by Aaron Levine purchased a piece of property. In 1957, the corporation dissolved and made a liquidating distribution of the property to Levine. Levine obtained two nonrecourse mortgages to consolidate previous mortgages and secure the property. During his ownership of the property, Levine reinvested funds back into the property through capital investments, took depreciation deductions as incurred from the mortgages on his federal income-tax returns, and retained a sum of $210,503.77 that he did not reinvest into the property. In 1970, Levine gifted the property to a previously created trust for the benefit of his grandchildren. In gifting the property, the trust assumed the remaining mortgages, interest, and unpaid expenses associated with the property. Levine filed a gift-tax return reporting the transfer and paid a gift tax on the equity realized. The Commissioner of Internal Revenue (the commissioner) (defendant) assessed Levine a deficiency on his income tax stating that Levine had also realized a gain in the amount of the excess of the total mortgages, interests, and expenses and that Levine should have remitted a capital-gain tax on that amount. Levine’s widow and his estate (plaintiff) challenged the commissioner’s deficiency notice in the United States Tax Court. The tax court upheld the commissioner’s decision, and the estate appealed.