Commissioner v. Tufts case brief

Commissioner v. Tufts

FACTS
-Clark Pelt, was a builder and owned Clark, Inc.
-He and Clark, Inc. formed a general partnership in 1970 in order to construct 120 unit apartment complex.
-Partnership entered into a mortgage loan agreement with the Farm & Home Savings Association for $1,851,500.
-It was a non-recourse loan - neither the partnership nor any of its partners had any personal liability for the loan.
-Other general partnerships later joined and are also respondents in this case.
-In 1971 each partner made small capital contributions to the partnership.
-In 1972 only Respondent made a contribution.
-The partnerships rental income was less than expected and they were unable to make the mortgage payments.
-Each partner sold his partnership interest to an unrelated third party. As consideration, the third party assumed the non-recourse mortgage.

PROCEDURAL HISTORY
-The Commissioner of Internal Revenue determined that the sale of the partnership resulted in a capital gain of approximately $400,000 arguing that the partnership benefited from the third party assuming the non-recourse mortgage.
-Tax Court upheld the Commissioner but Court of Appeals reversed.

ISSUE

-Is the amount of the non-recourse mortgage considered a gain when it exceeds the fair market value of the property?

HOLDING

-Yes, respondent must account for the proceeds of obligations that he has received tax-free and include in the basis.

RULES

-The gain or loss from a sale or other disposition of property is the difference between the amount realized on the disposition and the property’s adjusted basis.

DISCUSSION

-When a taxpayer sells or disposes of property, he is required to include the outstanding amount of the obligation as an asset realized.
-It is not relevant that this was a non-recourse loan or that the loan was in excess of the fair market value of the property at the time.