FACTS: Respondents, taxpayers in a partnership, sold an apartment complex with an encumbered nonrecourse mortgage, with a value greater than the property's value. Respondent did not include the unpaid balance of the mortgage in computation of the amount the taxpayer realized on the sale. Petitioner, Commissioner of the Internal Revenue Service, performed an audit and determined that the sale resulted in a partnership capital gain, on the theory that the partnership had realized the full amount of the nonrecourse obligation, and assessed a deficiency. Respondents challenged petitioner's determination, arguing that under the internal revenue code, petitioner failed to properly take into account that the value of the mortgage exceeded the sale, and therefore there was no economic benefit to be realized from the sale.
CONCLUSION: The court reversed the decision of the lower court and upheld petitioner's assessment of a deficiency against respondents from the sale of their encumbered mortgaged property.
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