Court Opinion

ID: 8938441
Source: CourtListenerOpinion
Date Created: 2022-11-27 07:43:38.816273+00
Date Added: 2024-06-11T17:09:40.809085
License: Public Domain

BEEZER,
Circuit Judge, concurring in part and dissenting in part.
I concur in parts I, II, and III of the majority opinion as regards the statement of facts, standard of review, and the proper valuation of the land donated by the taxpayers to Pitzer College, a charitable organization under section 170. Because I do not agree that this gift of encumbered land constitutes a bargain sale under section 1011(b), requiring the allocation of the basis between the portion “sold” and the portion contributed to the charity, I respectfully dissent from part IV of the opinion.
On the date of the transfer to Pitzer College, taxpayers’ property had an adjusted basis of $548,000 and secured an outstanding obligation of $544,584.1 The land was donated to Pitzer College subject to the note and deed of trust, which was without recourse against the taxpayers. Whether a gift of encumbered property to a charitable organization gives rise to a taxable gain under section 1011, even when the adjusted basis of the property exceeds the amount of the debt and when the taxpayers have received no economic benefit through relief from the encumbrance, is a matter of first impression in the courts of appeals. Statutory interpretation of the Internal Revenue Code involves a question of law reviewed de novo. Dumdeang v. Commissioner, 739 F.2d 452, 453 (9th Cir.1984).
Taxpayers concede that the disposition of the encumbered land through the contribution to Pitzer College resulted in an “amount realized” to the extent of the indebtedness under 26 U.S.C. § 1001. See Estate of Levine v. Commissioner, 634 F.2d 12 (2d Cir.1980) (in computing gain or loss from the “sale or other disposition” of property as the difference between the amount realized and the adjusted basis of the property, the amount of the encumbrance debt on gifted property constitutes amount realized), aff'ming 72 T.C. 780 (1979). The dispute in this case centers on the application of the basis provisions of section 1011. 26 U.S.C. § 1011.
Taxpayers contend that because the total adjusted basis exceeds the amount of the indebtedness (amount realized), taxpayers have not realized a taxable gain from the disposition of the encumbered land. See § 1011(a).
The Tax Court held, and the Internal Revenue Service argues before us, that a partial basis approach should be applied according to the allocation formula set forth in section 1011(b):
If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.
This “bargain sale” provision of § 1011(b) was adopted by Congress in 1969 to address, in part, the problem raised by the combined effect of not taxing the appreciation in value of property, and at the same time allowing a charitable contributions deduction for the entire amount of the appreciation. H.Rep. No. 413, 91st Cong., 1st Sess. (1969), reprinted in, 1969 U.S.Code Cong. & Ad.News 1645, 1699; 2 B. Bittker, Federal Taxation of Income, *916Estates and Gifts § 35.2.4, at 35-21 (1981). Prior to 1969, if a taxpayer sold appreciated property to a charitable organization at a price equal to the cost basis, the entire appreciation could be taken as a deduction and no tax was assessed on the gain. 1969 U.S.Code Cong. & Ad.News at 1699; Jackson, The New Rules Governing Bargain Sales to Charitable Organizations Under the Tax Reform Act of 1969, 24 Tax Lawyer 279, 279 (1971).
The “bargain sale” provision treats a charitable contribution as part sale, part gift, allocating the basis between the two separate elements of the transaction. The application of this statutory provision is particularly important in a situation where the amount realized by a bargain sale to a charitable organization is less than the adjusted basis. Ordinarily this would result in no gain at all; but with the allocation of the basis under the section 1011(b) formula, some gain will be realized if the property has appreciated. In the instant case, the Service applied section 1011(b) to the taxpayers’ transaction as follows:* 2
Fair Market Value: $588,996
Adjusted Basis: 548,000
Amount Realized (Debt): 544,584
(a) Ratio of Amount Realized to Fair Market Value
_Debt $544,584
Fair Market Value 588,996
Ratio = .9245971
(b) Allocation of Basis to Sale
, Adjusted Basis x Ratio = Allocated Basis
$548,000 x .9245971 = $506,679
(c) Calculation of Gain on Sale
Amount Realized (Debt) $¿44,584
Less: Allocated Basis 506,679
Gain: $ 37,905
By contending that section 1011(b) applies to the taxpayers’ transaction in this case, the Service is arguing that all gifts of property subject to encumbrance must be considered a “sale” under that section to the charitable organization for the amount of the indebtedness. Rev.Rul. 81-163, 1981-1 C.B. 433. The Tax Court has adopted this approach. Guest v. Commissioner, 77 T.C. 9, 24-26 (1981). I cannot conclude that Congress intended every transfer of encumbered property to a charity to be deemed a “sale,” regardless of whether there is any indicia of a “sale,” such as a direct economic benefit received by the transferor.
If Congress had intended section 1011(b) to have so broad an application, Congress would not have adopted the narrow term “sale” in its drafting of this statutory provision. By contrast, in several other sections of the Internal Revenue Code, when Congress intended a provision to govern other types of transfers, the language “sale or other disposition” has been enacted. See, e.g., §§ 1001(a), 1001(b), 1011(a). The Internal Revenue Code is a complex and intricate statutory compilation governing complex financial transactions. We must assume that Congress carefully selected and intentionally adopted the language enacted into federal tax law. By selecting the term “sale” in section 1011(b), Congress cannot be deemed to have intended something different. It is not the province of this court or the Tax Court below to conclude that Congress mistakenly enacted narrow language or absent-mindedly forgot to include language of broader application.3
Adopting a narrower interpretation of section 1011(b) than that suggested by the Service would not preclude practical applications of the provision to govern those transactions which are in substance a “sale,” although in form an exchange or other disposition. It does not do violence *917to the plain language of the statute to hold that a taxpayer may not avoid the basis allocation provision of section 1011(b) through a disguised sale, such as by receiving the proceeds of a money loan secured by appreciated property and then transferring the property to a charity subject to the debt. See Jackson, supra, 24 Tax Lawyer at 281. In such a case, the taxpayer has received a direct economic benefit by reason of the transaction. This type of disposition is properly regarded as a bargain sale to the charitable organization.
The question remains in the instant case whether any sale or exchange has occurred. See Jackson, supra, 24 Tax Lawyer at 280. The taxpayers in the instant case have not received any economic benefit as a result of the transfer of the land subject to the encumbrance.4 They did not receive the proceeds from the loan, as it arose as a purchase money encumbrance. They are not relieved of any personal liability by the transfer of the land to the college, as it was a nonrecourse loan.5 Nor could they deduct any depreciation with respect to the amount of the encumbrance as the property was unimproved.6
It is true that the taxpayers have realized a benefit of sorts by reason of the nonrecourse encumbrance, in that it facilitated speculation in land at little risk. With a minimal cash downpayment, the nonrecourse loan allowed the taxpayers to hold the property with little danger of loss or liability. Had the land depreciated in value, the taxpayers could have allowed it to be foreclosed at little actual loss to themselves. When the property instead appreciated in value, the taxpayers had the choice of selling the property and recognizing the gain or contributing the property to a charitable organization and claiming a deduction under section 170.
This, however, was a benefit realized by reason of the existence of the nonrecourse encumbrance as a financing method, not by reason of relief from the encumbrance through a transfer of the land subject to it. The intangible benefits of low-risk nonrecourse financing to investors in land is not the type of economic benefit that is so analogous to a “sale,” as to make section 1011(b) applicable.
The Service relies on Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947), as authority for the proposition that an economic benefit is obtained by the discharge of a nonrecourse mortgage. In Crane, the Supreme Court held that a taxpayer, who sold property subject to a non-recourse encumbrance, must include the value of the indebtedness in the computation both of the adjusted basis and of the amount realized upon the sale.
The primary ground for the Court’s decision was the impracticality of considering the taxpayer’s equity as the “property” interest for the determination of the basis, particularly in computing depreciation, because the equity constantly changes with amortization of the mortgage. Id. at 9-10, 67 S.Ct. at 1052; see also Commissioner v. Tufts, 461 U.S. 300, 305, 307, 103 S.Ct. 1826, 1830-1831, 75 L.Ed.2d 863 (1983); 2 B. Bittker, Federal Taxation of Income, Estates and Gifts § 35.2.4, at 43-19 (1981). *918(In fact, the taxpayer in Crane had claimed some $25,000 depreciation based on a basis of $250,000, which included the amount of the nonrecourse debt when the taxpayer inherited the property. 331 U.S. at 4.) As Bittker puts it, “The Court’s interpretation of IRC § 1001(b) [on amount realized] was, in essence, a by-product of the taxpayer’s $250,000 date-of-death basis for the property and her concomitant right to compute depreciation on that basis.” B. Bittker, supra, § 43.5.2, at 43-19. See also Estate of Levine v. Commissioner, 634 F.2d 12, 15 (2d Cir.1980).
However, the Supreme Court went beyond this ground of administrative simplicity justifying inclusion of nonrecourse indebtedness in the amount realized, to also reason that a transfer subject to a nonrecourse mortgage results in a benefit to the transferor that is “as real and substantial” as if a personal debt were assumed by another. 331 U.S. at 14. The Service argues that this holding is authority for its conclusion that the taxpayers in the instant case have received an economic benefit such that the transaction should be considered a “sale” subject to section 1011(b).
The economic benefit rationale of Crane has been the subject of severe criticism as both unpersuasive and unnecessary to the result. E.g., B. Bittker, supra, § 43.5.2, at 43-21; Adams, Exploring the Outer Boundaries of the Crane Doctrine: An Imaginary Supreme Court Opinion, 21 Tax L.Rev. 159, 169-70, 175-76 (1966); see Estate of Levine, 634 F.2d at 15 & n. 6. As Bittker explains:
The Court was right, of course, in asserting that owners of mortgaged property must keep up the payments if they want to retain the property and that for this period of time they must treat mortgages as personal obligations whether they are personally liable or not; but it does not follow that the “benefit” to such taxpayers from transferring the property subject to the mortgage is the same in both cases____
... Relief from a nonrecourse debt is not an economic benefit if it can be obtained only by giving up the mortgaged property. It is analogous to the relief one obtains from local real property taxes by disposing of the property: Like nonrecourse debt, the taxes must be paid to retain the property; but no one would suggest that the disposition of unprofitable property produces an economic benefit equal to the present value of the taxes that will not be paid in the future.
B. Bittker, supra, § 43.5.2, at 43-20 to 43-21 (emphasis in original).
The Supreme Court itself has recently backed away from this economic benefit reasoning. In Tufts v. Commissioner, 461 U.S. 300, 103 S.Ct. 1826, 75 L.Ed.2d 863 (1983), the Court extended the result in Crane to a sale where the unpaid amount of the nonrecourse mortgage exceeded the fair market value of the property. In such a ease, the landowner clearly does not have any incentive to maintain payments on the mortgage. Thus, under the Crane Court’s reasoning, there is no benefit obtained by keeping up payments, such that relief from the nonrecourse debt would be analogous to a discharge of personal liability.7 However, the Supreme Court held that the result in Crane still applied to this situation, stating:
Crane ultimately does not rest on its limited theory of economic benefit; instead we read Crane to have approved the Commissioner’s decision to treat a nonrecourse mortgage in this context as a true loan. This approval underlies Crane’s holdings that the amount of the nonrecourse liability is to be included in calculating both the basis and the amount realized on disposition. That the amount of the loan exceeds the fair market value of the property thus becomes irrelevant.
*919Id. at 307, 103 S.Ct. at 1831. See also B. Bittker, supra, § 43.5.2, at 43-19.
The Court thus grounded its holding in Tufts on the practical implications noted in Crane, particularly that by including the amount of the nonrecourse debt in the calculation of the basis, the taxpayer is permitted to take depreciation-deductions on that full amount. See Tufts, 461 U.S. at 309 & n. 7,103 S.Ct. at 1832 & n. 7. As the basis is computed on the assumption that the taxpayer is obligated by the amount of the indebtedness, it naturally follows that the amount realized must reflect the indebtedness, subject to which the property is transferred. In addition, the Court noted that, because the amount of the nonrecourse debt is included in the basis, permitting the taxpayer to limit his realization to the fair market value of the property (where the debt exceeds that basis amount) would allow the taxpayer to recognize a tax loss on the sale for which he has suffered no corresponding economic loss. Id. at 313, 103 S.Ct. at 1834.
Even were the Supreme Court to reaffirm the economic benefit reasoning in Crane today in its interpretation of section 1001 governing the calculation of the amount realized, which appears unlikely, I do not believe the Court would extend that artificial rationale to the very different context of section 1011(b) to determine whether a bargain “sale” has occurred. Contra Guest v. Commissioner, 77 T.C. 9, 24 (1981) (quoting Freeland v. Commissioner, 74 T.C. 970, 981 (1980)).
Finally, the regulation promulgated by the Treasury to govern the application of section 1011(b) to property transferred subject to encumbrance is not necessarily inconsistent with the reasoning in this dissent. The regulation reads:
If property is transferred subject to an indebtedness, the amount of the indebtedness must be treated as an amount realized for purposes of determining whether there is a sale or exchange to which section 1011(b) and this section apply, even though the transferee does not agree to assume or pay the indebtedness.
26 C.F.R. § 1.1011-2(a)(3) (emphasis added).
The regulation indicates that the encumbrance is to be considered as a factor in determining whether a bargain sale has occurred, to which section 1011(b) applies. Although the regulation clearly contemplates that transfers subject to indebtedness may constitute a “sale”, the posing of the question “whether” indicates there well may be such situations where a contrary conclusion may be reached. An acceptable interpretation of the regulation, as it is written, is to require the transaction to be examined in order to determine whether there is a disguised sale or exchange for the amount of the indebtedness.
In conclusion, I would hold that if the amount of nonrecourse indebtedness is less than the taxpayer’s basis in the property, the taxpayer does not receive a taxable gain from the transfer of appreciated property to a charitable organization subject to the encumbrance, unless the taxpayer has received an economic benefit as a result of relief from the indebtedness through transfer of the land. For this reason, I respectfully dissent in part.

. The adjusted basis consists of the note on the deed of trust amounting to $544,484 and a cash down payment of $3,416.

. The above represents the Service’s calculation of gain for all of the taxpayers except the Ebbens, as a higher fair market value for the land was determined in the Ebbens’ case. The same calculation for the Ebbens yields a gain of $73,-868.

. An examination of the legislative history of section 1011(b) is uninstructive in this case. The committee reports provide no elaboration on the meaning of the term "sale.” The House Report only includes an example of the provision, describing a standard sale of appreciated property to a charity at cost (basis). H.Rep. No. 413, 91st Cong., 1st Sess. (1969), reprinted in 1969 U.S.Code Cong. & Ad.News 1645, 1701. Although the legislative history may be silent, I conclude the plain language of the statute mandates the result suggested in this dissent.

. Although the payment of interest on the non-recourse debt was deductible, this was an out-of-pocket expense which cannot be considered an economic benefit to taxpayers.
Nor should the tax benefit of the charitable deduction be considered. This benefit flows from the provision of the Internal Revenue Code, and is not a direct economic benefit stemming from the sale itself.

. We need not decide whether relief from a recourse note, if still a purchase money encumbrance, would require a different result. A persuasive argument could be made that such satisfaction of personal liability is that type of economic benefit sufficient to constitute a “sale” under section 1011(b).

. We also need not decide whether the taking of depreciation deductions ■ would change the result. It is likely that depreciation deductions would instead be adjusted for under section 170(e), which reduces the amount of the charitable deduction by the amount of gain that would have been treated as ordinary income under the recapture rules of § 617(d) (certain mining property), § 1245 (certain depreciable tangible personal property), and § 1250 (certain depreciable real property) if the property had been sold at its fair market value.

. Indeed, the Crane Court noted it would have been an entirely different situation if the value of the property had been less than the amount of the nonrecourse mortgage. The Court acknowledged that, in such a case, the landowner who is not personally liable could not realize a benefit equal to the amount of indebtedness by transferring the property subject to the encumbrance. 331 U.S. at 14 n. 37, 67 S.Ct. at 1054 n. 37.