The question we must decide is: Where, by gift, decedent created a joint tenancy with inherited property that had appreciated in value, and thereafter both decedent and the surviving joint tenant made capital expenditures on the property, the capital improvements not having been shown to have appreciated in value from the time of making until decedent's death, does 2040 of the Internal Revenue Code of 1954, 26 U.S.C.A. 2040, require the entire date-of-death value of the property to be included in the decedent's gross estate, less only the capital contributions of the surviving joint tenant? The Tax Court decided in the affirmative, Estate of Edna V. T. Peters, 46 T.C. 407 (1966), and we affirm.

Briefly stated, the facts are that the decedent inherited certain real property, known as the Mt. Olivet Road property, from her husband in 1942, at which time its fair market value was $33,650.00. Six years later, at a time when the value of the property had increased to over $64,000.00, she created a joint tenancy with her son, T. Graham Peters. From 1948 until her death in 1960, the decedent contributed $10,168.31 toward capital improvements on the property, while her son expended $16,485.19. The property was appraised in Mrs. Peters' estate at $95,000.00. The record established, and the Tax Court found, that the value of the improvements contributed by the son at the date of decedent's death was the cost to the son at the time of his contribution.

Applying literally the terms of 2040,1 the Tax Court held that the entire value of the jointly owned property ($95,000.00) was includable in the gross estate of the decedent, except the $16,485.19 contributed by her son. Rejected were two alternative contentions made by the estate, premised upon the purported application of the regulations promulgated under 2040,2 that only the actual cash contributed by the decedent and the surviving tenant in the form of capital expenditures on the property (excluding the value of the property by inheritance at the time of the creation of the joint tenancy) need be considered in apportioning their respective interests for estate tax purposes, or that the apportionment should be made of the basis of the 'cost of acquisition' with decedent's cost including its fair market value at the date of her husband's death, thus eliminating the appreciation which occurred in the six years prior to the creation of the joint tenancy.3 The Tax Court held that '* * * the regulation in question was not written by respondent with this situation in mind and was not intended to and does not apply to the problem before us. * * * To apply this sentence of the regulation (italicized portion footnote 2) on the assumption that the decedent's cost was zero or that her 'cost of acquisition' was her basis (i.e., the fair market value of the property at the time of her husband's death) would require us to make a forced and unnatural construction of the sentence which would result in the circumvention of the obvious intendment of the statute and a contravention of the broad purposes stated in the first and fourth sentences of section 20.2040-1(a) of the regulations.' Id., p. 414.

The obvious scheme of 2040 is to recapture the entire value of jointlyheld property into a decedent's gross estate, notwithstanding the fact that the decedent may have made a gift under local law of one-half of the property. Section 2040 looks to the source of the consideration represented by the property and disregards legal title. In a case like that before us, the value of property is includable in the decedent's gross estate to the extent that the decedent furnished the consideration for acquiring the property; to the extent that that present value was supplied by consideration in money or money's worth flowing from the other joint tenant, that value is excluded from decedent's estate. The Tax Court's determination literally meets the language of 2040 that the entire value of the jointly-owned property at the date-of-death of the decedent ($95,000.00) should be included in her gross estate, except '* * * such part * * * shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money's worth * * *.' In the case at bar, the excluded portion was $16,145.19, which the record showed was the cost as well as the present value of the son's contribution.

We agree with the Tax Court that the regulations do not require a contrary result. Implicit in the language of 20.2040-1(a)(2) is the concept that its application is to purchased property subsequently put into joint ownership, not to inherited property thereafter put into joint ownership and improved.4 The decedent's initial acquisition of the property in this case was by inheritance.

It has been shown that the facts before us fit precisely into the scheme of 2040 without reference to the regulations. The estate points out that 20.2040-1(a)(1) of the regulations refers to property acquired by decedent and the other joint owner or owners by gift, devise, bequest, or inheritance and argues, therefore, that that section does not apply to this case. It follows, so the argument runs, that 20.2040-1(a)(2) which provides that 'In all other cases,' value is includable as therein provided, is applicable. To accept the estate's contention would be impliedly to hold that the treatment of value required by 20.2040-1(a)(2) of the regulations conflicts with 2040 of the Code, and that in this conflict the regulation prevails over the statute. This we could not do, even if we accepted the estate's reading of 20.2040-1(a)(2), for clearly in the event of conflict, the statutory provision would prevail. However, in our view this point is not dispositive of the case before us. We read the regulation as having no application to the instant case, and the decision of the Tax Court is in accord with the statute.

Affirmed.