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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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