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falls below the amount of the debt, it is the lender, and not the
debtor, who bears the risk of loss.
Nevertheless, it is well settled that nonrecourse liabilities
incurred to acquire property will constitute a part of the debtor's
cost basis in the property it has purchased. Crane v.
Commissioner, 331 U.S. 1, 14 (1947). Accordingly, the debtor may
claim deductions attributable to that debt--such as deductions for
depreciation.3 However, when the debtor disposes of the property,
the debtor must include in its amount realized from the disposition
of the property the amount of any nonrecourse debt to which the
property is subject. Thus, if the debtor has taken deductions
(such as depreciation deductions) that have lowered its cost basis
in the property to an amount less than the amount of the
nonrecourse debt, the debtor must recognize gain at least to the
extent that its basis is exceeded by the amount of debt secured by
the property. Commissioner v. Tufts, 461 U.S. 300, 307 (1983).
These nonrecourse debt principles apply to partnerships. Not
surprisingly, application of these rules to partnership allocations
produces some fairly complicated situations. If a partnership has
3 A purchaser's basis in an asset is, initially, its
cost. Sec. 1012. The Supreme Court in Crane v. Commissioner,
331 U.S. 1 (1947), established that the cost basis of an asset
includes nonrecourse indebtedness borrowed to purchase the asset.
See Mayerson v. Commissioner, 47 T.C. 340, 351-352 (1966). The
Internal Revenue Code provides that the basis is to be adjusted
to take into account certain factors, such as deductions for
depreciation under sec. 167(g). Sec. 1016(a) provides that such
deductions lower the amount of the purchaser's basis in the
property.
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