Document: 75 L.Ed.2d 863 103 S.Ct. 1826 461 U.S. 300 COMMISSIONER OF INTERNAL REVENUE, Petitionerv.John F. TUFTS et al. No. 81-1536. Argued Nov. 29, 1982. Decided May 2, 1983. Syllabus Section 752(d) of the Internal Revenue Code 1954 (IRC) provides that liabilities incurred in sale or exchange a partnership interest are to be treated "in same manner as connection with property not associated partnerships." Under § 1001(a) IRC, gain loss from other disposition is defined difference between "the amount realized" on and property's adjusted basis. 1001(b) defines "amount sum any money received plus fair market value (other than money) received." A general formed by respondents 1970 construct an apartment complex entered into $1,851,500 nonrecourse mortgage loan savings association. The was completed 1971. Due partners' capital contributions income tax deductions for their allocable shares ordinary losses depreciation, partnership's claimed basis 1972 $1,455,740. Because unanticipated reduction rental income, unable make payments due mortgage. Each partner thereupon sold his third party, who assumed date transfer did exceed $1,400,000. reported return indicated $55,740. Commissioner Revenue, however, determined resulted approximately $400,000 theory had realized full obligation. United States Tax Court upheld deficiencies, but Appeals reversed. Held: When taxpayer sells disposes encumbered obligation exceeding sold, this case, may require him include outstanding obligation; irrelevant calculation. Cf. Crane v. Commissioner, 331 1, 67 1047, 91 L.Ed. 1301. Pp. 304-317. (a) mortgagor's repay canceled, he relieved responsibility originally thus realizes extent within meaning 1001(b). To permit limit realization would recognize which has suffered no corresponding economic loss. must account proceeds obligations tax-free included Nothing either Court's prior decisions requires treat asymmetrically, including accounting upon property. 304-314. (b) 752(c) IRC—which purposes 752 "a liability subject shall, such property, considered owner property"—does authorize type asymmetrical treatment Rather, legislative history indicates limitation intended apply only transactions under §§ 752(a) (b), 752(d). 314-317. 651 F.2d 1058 (5th Cir. 1981), Stuart A. Smith, Washington, D.C., petitioner. Ronald M. Mankoff, Dallas, Tex., respondents. Justice BLACKMUN delivered opinion Court. 1 Over 35 years ago, 1301 (1947), ruled taxpayer, (the being less value), unpaid balance computation sale. case now before us presents question whether rule applies when exceeds sold. 2 * On August 1970, respondent Clark Pelt, builder, wholly owned corporation, Clark, Inc., partnership. purpose 120-unit Duncanville, Dallas suburb. Neither Pelt nor made contribution Six days later, agreement Farm & Home Savings Association (F H). agreement, F H committed complex. In return, executed note deed trust favor H. obtained basis: neither its partners personal repayment loan. later admitted four friends relatives, Tufts, Steger, Stephens, Austin, partners. None them contributed entering 3 construction During 1971, each small partnership; 1972, contribution. total $44,212. year, all depreciation. taken 1971 totalled $439,972. these deductions, 4 major employers Duncanville area laid off significant numbers workers. As result, expected, it partner, 28, unrelated Fred Bayles. consideration, Bayles agreed reimburse partner's expenses up $250; also 5 transfer, federal $55,740 been sustained.1 audit, $400,000. His obligation.2 6 Relying Millar 577 212, 215 (CA3), cert. denied, 439 1046, 99 721, 58 704 (1978), Court, unreviewed decision, asserted deficiencies. 70 T.C. 756 (1978). Fifth Circuit (1981). That court expressly disagreed analysis, and, limiting supra, facts, questioned theoretical underpinnings decision. We granted certiorari resolve conflict. 456 960, 102 2034, 72 483 (1982). II 7 1954, 26 U.S.C. 752(d), specifically "be 1001 governs determination gains 1001(a), Subsection realized": "The shall At issue application latter provision excess value. 8 took first controlling step toward resolution issue. Beulah B. sole beneficiary will her deceased husband. death January 1932, building then mortgaged proved equal value, estate purposes. widow, course, personally liable She operated nearly seven years, hoping turn profitable venture; during period, she taxes, interest, operating expenses, principal. computing depreciation debt. November 1938, hopes unfulfilled mortgagee threatening foreclosure, Mrs. building. purchaser paid $3,000; amount, $500 went 9 $2,500 transaction. reasoned zero (despite earlier based mortgage) simply cash received. disputed claim. He Crane's 113(a)(5) Act 52 Stat. 490 current version 1014 Code, amended, (1976 ed. Supp. V)), at time husband's death, interim, net purchaser. 10 upholding Commissioner's interpretation 1938 Act,3 observed regard merely taxpayer's equity lead actual physical deterioration recomputed payment U.S., 9-10, S.Ct., 1052. rejected claim belonged mortgagee. effect ruling undiminished Id., 11, 1053. 11 next proceeded determine 111(b) Act, 484 1001(b)). order avoid "absurdity," see 13, 1054, realizing worth over quarter million dollars, basis, is, do otherwise have permitted unconnected refused construe one section so "to frustrate whole." Ibid. 12 Crane, insisted nature required different treatment. two reasons, disagreed. First, excluding debt result absurdity frustration Code. 13-14, 1054. Second, concluded benefit purchaser's assumption identical conferred cancellation exceeded mortgage, doing could realize appreciation represented boot. taxable her, just if given, addition boot, sufficient satisfy mortgage.4 13 footnote, pertinent present observed: 14 "Obviously, mortgagor cannot Consequently, problem might encountered where abandoned transferred without receiving case." 14, n. 37, 1054-55, 37. B 15 This unresolved disinclined overrule we conclude transferred. ultimately does rest limited benefit; instead, read approved decision context true approval underlies holdings calculating both disposition. becomes irrelevant. 16 receives loan, incurs some future date. obligation, qualify taxpayer. fulfills likewise liability. 17 Another consequence occurs purchase price used secure repay, entitled property; 1012, part cost Although approach respect loan,5 chosen accord gives recourse choice challenge here. resultant benefits predicated repaid full. 18 disposed assumes extinguishment accounted realized.6 See Hendler, 303 564, 566-567, 655, 656, 82 1018 (1938). recognized basis,7 teaches ignore determining rationale original inclusion rested repay. Moreover, balances fact assumption. Unless deemed realized, effectively untaxed extended unwarranted increase property.8 fashion said unreasonable. C 19 applied even falls below Treas.Reg. 1.1001-2(b), CFR 1.1001-2(b) (1982);9 Rev.Rul. 76-111, 1976-1 Cum.Bull. 214. equally situation, 660 (1977), aff'd issue, 215-216 (1978);10 Mendham Corp. 320, 323-324 (1947); Lutz Schramm Co. 682, 688-689 (1943), reason, after treatment.11 20 Respondents concomitant year 2012. borrower mortgagee's remedy foreclosing securing alter shift lender potential caused devaluation property.12 If ability protect interests impaired, free abandon 21 This, erase understanding amount. Woodsam Associates, Inc. 198 357, 359 (CA2 1952); Bittker, 33 Tax.L.Rev., 284. From point view, party purchases borrowed 22 avoids Crane. accompanying relevant economically mortgagee, lending remains risk. loss.13 Such "one . defeat intention another 23 specific circumstances support footnote acknowledged limitations set facts. stands broader proposition, should therefore hold Estate Levine 634 12, 1980). III 24 Code's 752(c), argue Congress provided precisely prescribes certain transactions,14 "[f]or section, property." Inconsistent interpretation, language mandates apparent conflict subsections renders facial statute ambiguous, look statute's structure history. 25 Subsections prescribe rules partnership, interest. 704(d), distributive share 704(d) ed., V); Perry, Limited Partnerships Shelters: Rule Goes Public, 27 L.Rev. 525, 543 (1972). increased takes treats results Conversely, 752(b), decrease distribution, thereby reducing losses. distributed transferee 1.752-1(c), 1.752-1(c) contemplated 752(c). Mention (b).15 reference subsection (d) discuss limitation.16 While certainly conclusive, directed partnership.17 Willis, J. Pennell, P. Postlewaite, Partnership Taxation 44.03, p. 44-3 (3d 1981); Simmons, Tufts Commissioner: Amount Realized Fair Market Value, U.C.D.L.Rev. 577, 611-613 By placing connected distributions partnerships apparently prevent inflating Otherwise, additional risk raise reduce Newman, Resurgence Footnote 37: Wake Forest 16, 116 There similar abuse sales parties. light above, interpret (c) transactions, IV 28 properly among assets find consistent implement statutory mandate reasonable manner. National Muffler Dealers Assn. States, 440 472, 476, 1304, 1306, 59 519 (1979). 29 judgment 30 It ordered. 31 O'CONNOR, concurring. 32 I concur accepting view Commissioner. not, endorse view. Indeed, were writing slate clean except take quite approach—that urged Professor Barnett amicus. established entirely own, spite "coinvestment" form consequences, belongs mortgagor. alone, though, way tie reason purchase, ownership, eventual differently because out independent purchased using financing, declined buyer events buys cash; obtains pledging security; still hand, devalued finally 34 logical hypothesized separate aspects consider, first, ownership second, arrangement retirement acquisition price—represents represents more can expect collect equals acquisition. Thus, taxation transaction reflects fate here, recognizes new See, e.g., Davis, 370 65, 72, 1190, 1194, 335 (1962); Gibson Products 637 1041, 1045, (CA5 1981) (dictum); generally 1.1001-2(a)(3), 1.1001-2(a)(3) (1982); Federal Income Income, Estates Gifts, ¶ 41.2.2., 41-10—41-11 borrowing transaction, acquires need time, money. Later, able surrendering face debt, classic situation indebtedness, requiring creditor. 61(a)(12). financing 36 separation important sorts differently. treatment, 1202, 1221 V), while indebtedness defer. 108, 1017 V). Not Barnett's approriate types restores continuity system making taxpayer-seller's Further, most important, allows 37 Persuaded though am coherence internal consistency approach, agree adopt judicially. write marked longstanding position, C.B. 214, reflected regulations. 1.1001-2, 1.1001-2 numerous cases lower courts unrepaid disposition, see, 1980); 212 (1978); Delman 73 15, 28-30 (1979); Peninsula Properties Co., Ltd. 47 B.T.A. 84, 92 (1942), difficult bounds discretion. demonstrates, defensible. One reasonably 1001(b)'s property" (emphasis added) collapse long reading 1001(b), defer regulations promulgated agency charged statute. 488-489, 1312-13, Correll, 389 299, 307, 88 445, 449, 537 (1967); Fulman 434 528, 534, 98 841, 845, 55 Accordingly, concur. $1,455,740, individual returns, respective petitions subtracting Bayles, $1,851,500. Of resulting figure, $395,760, $348,661 gain, pursuant 741 741, $47,099 recapture provisions 1250 character "property acquired devise decedent's decedent" acquisition." interpreted term "property" refer land buildings aggregate rights control dispose them. 6, 1050. argued Sixteenth Amendment overall "by dictates common sense ruinous disaster." Brief Petitioner O.T.1946, 68, 51. noted, actually years. allow exclude sums those calculation double deduction assets." Amendment, said, result. 15-16, 1055. adopted theory, implicit contentions, but, joint investment contingent liability, gradually decreasing Note, Treatment Nonrecourse Debt, Colum.L.Rev. 1498, 1514 Lurie, Mortgagor's Gain Mortgaging Property More Cost Without Personal Liability, Tax.L.Rev. 319, 323 (1951); cf. (nonrecourse resembles preferred stock). Colum.L.Rev., 1515; 1047-1048 (contingent prevents oil gas leases secured leases, drilling equipment, percentage production). express so, books, analysis. presumed portion 10, 1052, 28. constitute coinvestment But 1513 (treating critically concluding departed traditional analysis property). proceeds. initially given discount, funds Rail Joint 61 751, 1932) (cancellation indebtedness); Fashion Park, 600, 606 (1954) (same). Sneed, Configurations Gross 319 (1967) ("[I]t appears settled reacquisition bonds discount obligor price, par, reacquisition"). "laid foundation stone shelters," Shelters, Case, 277, 283 permitting taxpayers bear depreciable recently acted curb avoidance device forbidding amounts investment. Pub.L. 94-455, 204(a), 90 1531 (1976), 465; 95-600, 201-204, 2814-2817 465(a) Real investments, exempt prohibition. 465(c)(3)(D) congressional action foreshadow day debts differently, sought realized. affinity rule, 282; Del Cotto, Sales Other Dispositions 1001: Taxable Event, Related Problems Basis, Buffalo 219, different. Our taken. focuses subsequent extinguishment, taking recovery deductions. 1526-1529. regulation pending Circuit. T.D. 7741, 45 Fed.Reg. 81743, 1981-1 430 (1980). formalized however. Third affirmed necessary enjoying deduction. F.2d, 215; 4, supra. ground, address validity rationale. Wayne G. Barnett, amicus argues portions separately. there $1.4 million, $1.85 million. former $50,000, $450,000 income. deferred 108 respondents' bases interests. indeed justifiable mode Nor anything indicate it. assume identically. characterize indebtedness. presented decide contours cancellation-of-indebtedness doctrine. our fall interpretations doctrine rests initial premise here—an repay—but relies freeing-of-assets attribute debtor cancellation. Jacobson, 336 38-40, 69 358, 363-64, 93 477 (1949); Kirby Lumber 284 3, 76 131 (1931). According forgiven, debtor's reduced until Fulton Gold 519, 520 (1934). attributes freed, insolvent Lakeland Grocery 289, 292 (1937). Similarly, never canceled law negative prong approach. 1001, income; enters nonrecourse: context, avoided. Judge Learned Hand "[The mortgagor] manages it; sell goes him; him, lien. makes allowance vendee lien, secures release charge condition title lien cleared. ." 153 504, 506 1945). Government bore ultimate planned endorsed insurance 221(b) (d)(4) Housing 1715l After acquiring respondents, few profitable. 1974, foreclosed, Department Urban Development obtain title. 1976, developer $1,502,000. financed Department's back $1,314,800 fail therefore, compound Government's claiming themselves. provides: "(a) Increase "Any liabilities, "(b) Decrease distribution "(c) Liability "For "(d) Sale "In along H.R.Rep.No. 1337, 83d Cong., 2d Sess., A236 (1954); S.Rep.No. 1622, 405 (1954). "When exchanged, applied." H.R.Rep. A236-A237; S.Rep. 405. These Reports example (d)'s application, nonrecourse. Treasury Regulations interpreting state: "Where transferee." contain applying mention limitation. 752-1(d). Both issued contemporaneously passage statute, 6175, 1956-1 211, deference administrative South Texas 333 496, 501, 68 695, 698, 831 (1948).

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