Throughout the entire ownership period of the Brooklyn Apartment Building (between 1932 and 1938), Beulah claimed depreciation deductions in the aggregate amount of $25,200 (51) on the Crane Estate's and her own federal income tax returns.
Although absent from the Supreme Court's opinion, the Record (53) reveals that the relatively large amount of allowable depreciation deductions produced only minimal benefits for the Crane Estate and Beulah.
Similarly, in 1937 and 1938, the two years Beulah operated the Brooklyn Apartment Building in her individual capacity, she claimed the aggregate amount of $6,700 of depreciation deductions on her personal income tax returns.
In summary, due to the limited amount of net rental income generated by the Brooklyn Apartment Building, of the $25,200 of depreciation deductions claimed by the Crane Estate and Beulah, only $3,307 of those deductions was needed to reduce net rental income to eliminate all tax liability.
Step Two: Sale of the Brooklyn Apartment Building Triggered the Transformation of Useless Depreciation Deductions into Taxable Gain
The minimal tax benefits Beulah and the Crane Estate received from the allowable depreciation deductions did not, on their own, cause Beulah's harsh tax consequences.
Second, virtually all of the taxable gain Beulah was compelled to report was attributable to useless depreciation deductions that reduced the basis of the Brooklyn Apartment Building.
The following charts set forth a year-by-year breakdown of: net rental income generated by the Brooklyn Apartment Building, the amount of depreciation deductions claimed by the Crane Estate and Beulah, the net income as reduced by depreciation deductions, the section 1016(a)(2) basis reductions, the tax savings the depreciation deductions produced, and the amount of the useless depreciation deductions transformed into taxable gain upon the sale of the Brooklyn Apartment Building.