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In Tufts, the Supreme Court held that where a taxpayer
disposes of property encumbered by nonrecourse indebtedness in an
amount that exceeds the fair market value of the property, the
outstanding amount of the nonrecourse obligation is includable in
the amount realized by him. Moreover, the Supreme Court
concluded:
Unless the outstanding amount of the mortgage is deemed
to be realized [at the time of sale], the mortgagor
effectively will have received untaxed income at the
time the loan was extended and will have received an
unwarranted increase in the basis of his property.
* * * [Id. at 310; fn. ref. omitted.]
“In so holding, the Supreme Court reaffirmed the Crane ‘balancing
entry’ theory which is that the amount of the nonrecourse
liability is to be included in calculating both the basis and the
amount realized upon disposition.” Rice’s Toyota World, Inc. v.
Commissioner, 81 T.C. 184, 196 n.9 (1983), affd. in part, revd.
in part and remanded 752 F.2d 89 (4th Cir. 1985). This theory is
based upon the assumption that the mortgage was properly
includable in basis from the beginning and that it will be repaid
in full. Id. Accordingly, we have concluded that Tufts involved
the symmetrical treatment to be accorded where nonrecourse
liability has been properly included in basis initially and must
thereafter also be included in the amount realized on disposition
of the encumbered property. Dean v. Commissioner, 83 T.C. 56, 78
n.10 (1984).
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Last modified: May 25, 2011