## Facts

- Arthur K. Hellermann and V. Louise Hellermann purchased four buildings in 1964 for $93,312.
- They sold the buildings in 1976 for $264,000 and reported a capital gain of $170,688.
- They paid the capital gains tax shown on their 1976 return but did not compute or pay the additional minimum tax on tax preferences under I.R.C. §§ 55–58 (as then in effect).
- The Commissioner determined a 1976 income tax deficiency of $11,206.60 based primarily on inclusion of capital gain as a tax preference item under § 57(a)(9)(A) and application of the minimum tax under § 56.
- Petitioners contended much of the reported gain reflected inflation, citing CPI changes between 1964 and 1976, and calculated an inflation-adjusted “economic gain” of about $88,167.
- Petitioners argued the inflationary component was a return of capital, not “income” under the Sixteenth Amendment, and therefore could not be taxed without apportionment; they also sought a refund of capital gains tax already paid.
- The case was submitted on a stipulated record.

## Issues

1. Whether the portion of realized gain attributable solely to inflation is “income” within the meaning of the Sixteenth Amendment and taxable without apportionment.
2. If inflationary gain is taxable income, whether petitioners were liable for the minimum tax on tax preferences on the full nominal amount of their 1976 capital gain.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination.
- The court held that gain attributable solely to inflation is “income” within the Sixteenth Amendment and taxable without apportionment.
- The court held petitioners were liable for tax measured by the full nominal realized capital gain, including the minimum tax consequences applicable to that gain as a preference item.

## Legal Principles

- For federal income tax purposes, realized gain from the sale of property is measured in nominal U.S. dollars as the excess of amount realized over basis, without a constitutional requirement to adjust for inflation.
- The Sixteenth Amendment permits taxation of realized capital gains measured in nominal dollars, even when part of the gain reflects changes in the purchasing power of money.
- Any decision to index basis or capital gains for inflation is a legislative policy choice; it is not constitutionally compelled.
- When nominal capital gain constitutes an item of tax preference under the Code provisions then in effect, the minimum tax applies based on the full nominal gain.

## Conclusion

The Tax Court rejected the argument that inflationary appreciation is a non-taxable return of capital, holding that the full nominal realized gain is taxable income under the Sixteenth Amendment and triggers the minimum tax on tax preferences as determined by the Commissioner.


Hellermann v. Commissioner, 77 T.C. 1361 (1981)