R. Edwin Brown and Winsome S. Brown - Page 12

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               Respondent argues that Tufts is controlling, while                     
          petitioners argue that the transaction at issue was subject to              
          section 465(b)(4) and therefore Tufts has no application.4                  
          We essentially rejected petitioners' argument when we previously            
          held that the at-risk rules of section 465 do not supersede the             
          judicial doctrines for testing the inclusion of purported                   
          nonrecourse debt in basis.  Waddell v. Commissioner, 86 T.C. 848,           
          899 (1986) (citing S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3)             
          49, 86, and noting that the at-risk rules do not replace the                
          rules for basis determination), affd. 841 F.2d 264 (9th Cir.                
          1988).  Since the debt is included in basis notwithstanding any             
          limitations imposed by section 465, the exception in section                
          1.1001-2(a)(3), Income Tax Regs., would not apply.  Moreover,               
          under the symmetrical analysis, it follows that where nonrecourse           
          liability has been properly included in basis initially, it must            
          thereafter also be included in the amount realized on disposition           
          of the encumbered property.                                                 
               Furthermore, we note that the losses limited by section 465            
          are recognized upon disposition of the property.  Allen v.                  
          Commissioner, T.C. Memo. 1988-166; see also sec. 465(a)(2).                 

          4    Petitioners refer to a footnote in Tufts in support of their           
          position:  “this congressional action [enactment of sec. 465] may           
          foreshadow a day when nonrecourse and recourse debts will be                
          treated differently”.  However, respondent points out that the              
          Supreme Court went on to say that “neither Congress nor the                 
          Commissioner has sought to alter Crane’s rule of including                  
          nonrecourse liability in both basis and the amount realized.”               
          Commissioner v. Tufts, 461 U.S. 300, 309 n.7 (1983).                        

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