John F. Tufts and Mary A. Tufts v. Commissioner of Internal Revenue

Although quest at one time our Erie

might Mary Tufts, by ascertaining, have been satisfied John F. TUFTS and A. et al., Petitioners-Appellants, puts report- the Court it “that there is no ed case—which stands on all fours with this “squarely one” and an absence of control- COMMISSIONER OF INTERNAL 1055) ling precedent” (p. longer we no need REVENUE, Respondent-Appellee. depend predictability prediction. or our No. 79-2258. See, Schein, 1974, Lehman Bros. v. 416 U.S. 94 S.Ct. 40 L.Ed.2d 215. Appeals, United States Court Fifth Circuit. We have the answer at hand. We have it Unit A certification, simple and an authori-

tative answer forthcoming July would be either answer, con, pro Courts Rehearing Rehearing En Banc declining accept certification. 19, 1981. Denied Oct. frеsh, The need “arguably for a out-

moded” answer cannot be better said than

in this Court’s own words:

“We are mindful strong public

policy in favor protecting those who duty

fulfill their testify truthfully Moreover,

court proceedings. we are

cognizant of the possibility that these present

facts compelling a more case for

recognition “public policy” excep-

tion than Georgia those which the ...

courts have confronted. However we

also realize that the at will rule is itself

grounded important, although argu-

ably outmoded, public considerations of

policy.” (emphasis added).

I would certify important question ‍​‌‌​​‌​​‌​​‌​‌‌​‌‌‌​‌​‌‌​​‌​​‌‌​​‌​‌​​​​​‌​‌‌‌‌​‍Georgia. Court of To this

Court’s failure to use this remarkable de-

vice I dissent.3 Mankoff, Dallas, Tex., peti-

Ronald M. tioners-appellants. Gen., Ferguson, Atty.

M. Carr Asst. Mi- Andrews, Paup, Atty., chael L. Gilbert E. Circuit, 3. Since of all opinion the six States of the Fifth concur in the Court’s as to the Texas procedure, Texas alone has no certification I claim. title, his Section, right, interest and all of and inter- Chief, Gilbert Roth- Appellate Act. Div., partnership Section, by est in owned the Tax U. enberg, Appellate S. Stein, Bayles, party.1 third Justice, Fred an unrelated Mr. Dept, Lester Chief Coun- of Service, agreed expenses sel, Washington, Bayles pay the incurred Internal Revenue sale, C., up partners the as a result of the resрondent-appellee. D. for consideration, He and other $250. subject to acquired complex the the nonrec- liability. ourse and BROWN, THORNBERRY Before partner proportion- had his Each included Judges. WILLIAMS, Circuit in ate of the entire million com- share $1.8 and puting partnership, his basis in the the THORNBERRY, dispute propriety Judge: Commissioner did the Circuit Commissioner, computation. The that 1970, August In John Tufts and re- however, included full amount general part- a maining appellants formed partnership liability in the constructing an nership purpose for the upon realized the sale and therefore amount Duncanville, apartment complex Texas. partners each determined that of the had arranged partnership ap- The for a loan of partner- gain on sale of his realized proximately million in order to finance $1.8 appealed ship partners interest.2 The complex. construction of the The court, arguing the tax that nonrecourse lia- provided note covered the entire cost and bilities should be included amount real- partnership part- that nor the neither the only ized the fair market the extent of personally for repay- ners were liable its partnership property securing of the complex completed The ment. was Au- upheld The the indebtedness. tax court gust 1971. to adverse economic condi- Due taxpayers filed and the area, tions in the Duncanville the income appeal. generated complex was never in Crane v. Com- enough partnership to enable the to make The Court held missioner, payments on As 91 L.Ed. mortgage principal. 331 U.S. August (1947), subject the fair market value of that million, prop- on which the owner of the $1.4 had declined to sold, erty personal liability principal balance due on the mort- assumes no gage the amount of note remained at million. On the amount realized includes $1.8 date, mortgage.3 In footnote 37 partnеr partnership each sold the unassumed gain provides (emphasis I.R.C. or loss from exchange partner- or interest in a sale apartment building ship 3. Mrs. Crane inherited an gain shall be loss from considered as or $250,000, subject asset, a nonrecourse exchange capital except worth mort- sale amount, gage provided (relating in the held it for seven same as otherwise in I.R.C. it, years, inventory and sold to the unamortized to unrealized receivables and items reported appreciated substantially mortgage, $2500 which have in cash. She value. sale, gain arguing $2500 provides part: acquired property she from husband’s her building (a) equity was estate COMPUTATION OF GAIN LOSS.— OR (which gain disposition her under I.R.C. 1014 entitled to a from the sale zero), realized for shall be the amount basis of the amount excess adjusted pro- equity $2500. realized therefrom over the basis when she sold it was gain, determining rejected argument, holding vided in 1011 for section Court adjusted shall loss be the excess of the inherited Mrs. Crane was provided determining merely basis in such equity, section the real estate loss (which unadjusted over amount realized. under 1014had an basis of (b) AMOUNT REALIZED.—The amount re- $250,000), on the and that the amount realized disposition alized from the sale or other property the full amount sale also included any shall be sum of re- recourse debt. plus proper- ceived ty (other the fair value of the market money) received. however, Millar, opinion, appeal, agreeing er on the Crane also identified this concern for deduc- observed: double as the principal tions reason for Obviously, if the value of the holding. They invoke the double de- mortgage, less than the amount language support duction of a tax bene- mortgagor who is not liable essence, theory: argument, fit the that equal cannot realize a benefit to the taxpayer enjoyed previously who has the mortgage. Consequently, different deductions, large benefit withоut problem might be encountered where a has, placing risk, his own assets at tak- mortgagor the abandoned deductions, ing improved those his economic transferred it position, realizing gain. According thus to receiving That without boot. is not this court, the Commissioner and the tax the case. taxpayer, disposing on property, of the n.37, at 14 S.Ct. The U.S. at 1054. must somehow be made to account for the question presented by appeal this is wheth- enjoyed. previously benefits er exception footnote 37 an creates the do not that We this concern for holding Crane through implication its clear was principal double deductions the reason that the disposition amount realized on the underlying the Crane decision. The Crane of property by a encumbered language leaves no doubt that the Court mortgage cannot exceed the fair market thought that Crane improved Mrs. had of the Our analysis the by availing financial condition herself of underlying reasons decision leads the allowable deductions. But before the us to the conclusion that such a fair market Court had even mentioned double deduc- value limitation is there- warranted. We tions, already it had concluded that judgment fore reverse the of the tax court. properly Commissioner had determined the The Commissioner on primarily relies reaching amount realized. After that con- decision in Millar v. 577 F.2d clusion, acknowledged Court distinc- (3rd Cir.), denied, cert. U.S. statutory (that tion between income which 58 L.Ed.2d 704 The Millar Congress through has leg- decided reach rejected reading court a literal of footnote islation) (that and constitutional income thought 37 in view what to be the reach, Congress power which has principal reason underlying the Crane deci so). argued to do chooses Mrs. Crane had sion. following The court on focused she had alternative that been taxed on language: meaning what was not within incomе case, The really, crux is whether the sixteenth amendment. The Court re- permits the law her to exclude allowable sponded argument to this constitutional comput- deductions from consideration in paragraph opinion, the last of its and in ing gain. that, already We have showed paragraph that last the Court for the first does, if it taxpayer can enjoy a double expressed time concern for double deduc- deduction, effect, same loss of prefer We tions. therefore to read this assets. expression of primarily concern as a re- sponse argu- to Mrs. Crane’s constitutional Crane, 557 F.2d quoting U.S. ment, and principal justification not as the 15-16, 67 S.Ct. According at 1055. statutory for the Court had pri- Millar panel, Court was opinion.4 announced earlier in the marily might taxpayer concerned that enjoy some sort of double deduction. compelling is an more reason There even below, tax court as well as the Commission- why previously the fact that ‍​‌‌​​‌​​‌​​‌​‌‌​‌‌‌​‌​‌‌​​‌​​‌‌​​‌​‌​​​​​‌​‌‌‌‌​‍a has preference opinion Appeals, 4. We must confess that our stems author Court uncertainty our from as to the na- exact stated: who ture of the “double deductions” concerned By hypothesis taxpayer] have been will [the apparently the Court. The Court was endors- seriаtim, upon allowed deductions based ing Hand, reasoning Judge Learned buildings; value of he will in actual addition have got gain a reduction we look what said depreciation When large enjoyed benefit justify immediately before it announced its conclu- an ex- is insufficient deductions properly sion had of amount real- the Commissioner pansion of the definition realized, the amount we see see, the Internal determined by looking ized. justified Code, in that the Court its result on a theo- already Revenue benefit, ry recognizing first previous for those deduc- economic accounted fact Code, “gain” from that the term “amount reаlized” could According to the tions. expanded equiv- benefit disposition property is where economic sale or other subtracting “adjusted ba- alent could identified. The Court computed by to cash began noting if Mrs. sis” from the “amount realized.” is the been liable on the 1001(a). “adjusted basis” cost it, purchaser paid the de- had either assumed property adjusted to reflect would clear- depletion, and other costs the amount so or assumed preciation, the chargeable property. ly the been considered a against have Thus, Mrs. Crane would any 1016. tax benefits that the amount realized because payment in the form of have received the benefit of the taxpayer may have received ” already been “in and prior deductions have factored ‘as real substantial [a sense]’ through adjustments paid to her and then gain equation money the the been into her to 331 U.S. by those deductions have been over her creditors. to basis. Since 13, 1054, basis, citing adjustments to at 67 at United States through S.Ct. accounted for 655, Hendler, 564, 58 82 they cannot also v. 303 S.Ct. logically follows U.S. it (1938). the proposition L.Ed. That of the definition of 1018 support expansion an are from which derives principle To for those de- economic amount realized. acсount tax- indisputable: on which a equation by the same ex- when a debt ductions twice in discharged, the payer amount realized liable panding the definition of would, pay- necessity is freed from the adjusting taxpayer well as basis downward think, obligation cash or other assets taxing taxpayer ing twice on with we equal principal to the amount component gain.5 same Com- in value Kirby Lumber theory on a of tax bene- United v. missioner’s reliance debt. States 4, then, Co., fit, 76 131 misplaced. clearly The Code 52 S.Ct. L.Ed. U.S. thought “recapture" prior (1931). followed provides for a de- What however, ductions,6 through proposition, is worth its definition of from that but quоting: amount realized. Congress chose to “consider” account to which actual “wear and tear” extent adjust- selling price. jus- through has Manifest reduced those allowable deductions basis, expansive though tice that he surrender one or demands must ments to and not the other.... of amount realized. definition Crane, (2nd v. 153 F.2d Commissioner 1945). always supposed Cir. gress We had that Con- merely fact, more In even than the Code does depreciation deductions on chose to allow depreciation recapture prior actual- deductions assumption di- that wear and tear would ly taxpayer. re- Section 1016 taken рroperty. In minish the value of the words, quires the basis be reduced compensate prop- decided to depreciation allowable whether the amount of erty owner, allowing deprecia- him to take Corp. Virginia or not it is taken. Hotel deductions, expected tion for an loss Helvering, 87 L.Ed. U.S. 63 S.Ct. property. due to We deterioration there- operates 1016 thus Section why, fore do not understand if the taxpayer enjoyed a tax not the whether or expected, does in fact decline in value as was contrast, a deduction. In benefit via taxpayer justice” requires “manifest prevent designed rule is benefit previous somehow “surrender” deductions personal gains taxpayer making from actual gain or the never that he realized. See, g., through e. unwarranted deductions. analysis entirely

5. We note that our consist- taxes, (bad debts, prior delin- I.R.C. quency fully language. agree We ent the Crane prior years must off in amounts written permit taxpayer the law does not “to recovered, unless in income when included exclude allowable deductions from considera- tax). prior not reduce deduction did 15-16; gain.” computing tion 331 U.S. merely We have concluded that the notion that “an mortgagor, person property, that a owner think [W]e debt, аlly prop figure on the who sells the mortgaged liable at a than less that at erty subject mortgage and for ad sell, which the will must and will consideration, ditional realizes benefit mortgage treat conditions exact- mortgage in the amount of the as well as ly personal obligations.” they as if were his boot, purchaser pays If a boot.37 it is We initially admit that we succumbed to problem immaterial as to our whether the notion, the facile appeal of that but on mortgagor money is also to receive from are rings reflection we convinced that purchaser discharge mortgage long true only so as the actually sale, prior to or whether he is merely to keep property.7 wants to If the taxpay- transfer may—it decides, whatsoever, any er reason purchaser make a difference to the longer he no and respon- wants the burdens mortgagee, mortgagor. not to ownership, accompany sibilities that he can put Or another way, we are no more party transfer the to a third is, mortgagor whether the concerned regard absolutely party’s willing- to that strictly speaking, a on the debtor mort ability obliga- ness or to meet the gage, are with whether the bene tions, yet rest assured that his other assets is, strictly fit to speaking, reсeipt him cannot be reached. We with Profes- are rather sor Bittker: with the reality concerned that an owner Relief from nonrecourse debt is not an of property, mortgaged figure aat less if be economic benefit it can obtained sell, property that which the will only up by giving mortgaged proper- must will treat the conditions of the ty. analogous It is to the relief one ob- mortgage exactly they as per were his property by tains from local real taxes obligations.38 sonal If he transfers sub disposing of the Like property. nonrec- ject mortgage, the benefit to him debt, ourse paid taxes must be to is as reаl and as substantial if the mort retain one gage discharged, property; but no would personal were or as if a suggest disposition unprofit- debt of equal in an amount been as by property produces sumed another. able an economic bene- equal present fit of to value the taxes 67 (empha- U.S. at S.Ct. at 1054-55 that will be not in future. sis n Shelters, is, think, Bittker, Debt, This theory economic benefit Tax Nonrecourse flawed, seriously premised Case, in that is on and the Crane Tax L.Rev. Thus, provides analogy: 7. Bittker Professor Crane overstates the resemblance be- personal obligations. tween nonrecourse and was, course, right asserting The Court in Bittker, Shelters, Debt, Tax Nonrecourse mortgaged property that the owner of must Case, (1978). Crane Tax L.Rev. keep payments up the if wants he to retain rejects Professor Bittker the economic benefit property period time, and that for this fallacious,” theory “wholly justifies as but personal obliga- he must treat the debt as a result reached the Court on what he calls a tion whether he is does not him from the you liable or not. It entry balancing according theory. decision, follow, however, that the benefit to Bittker, justifiable “was because it transferring subject property brought consequences taxpayer’s the tax is the both same in cases. If dealings harmony her gourmet meals, you pay into crave must for reality by deprecia- continues; recapturing long your economic her them so addiction they you habit, you tion deductions to the ed ty.” pay extent that exceed- once break the need proper- you bought her investment in the encumbered those on credit in the Bittker, then, past, agrees you skip Id. at 282. Professor those that will mortgages. with the fair future. ourse as the it is Commissioner that it is somehow un- So Nonrec- obligations enjoy disregarded can for a the benefit of sub- be as soon sold, having placed away, given is stantial dеductions without own assets or aban- note, doned; personal liability persists risk. As we we think even after will of, argument properly disposed been whether directed at the Con- gress, subject may the new owner assumes or takes the debt. not at the courts. It be that Profes- directing sor so See id. at Bittker was it. 284. so the fair market value limitation deny that Mrs. Crane “[o]bvi- do anticipated by footnote 37 war- ously” purchaser had to received some benefit: the fair market ranted. We hold that willing or at least pay off the securing nonrecourse debt the mort- to take the limits the to which the debt can extent pocket could Mrs. Crane gage before disposi- included in the amount realized do, however, seriously equity. We in $2500 property.8 tion of the full amount question whether accurate measure is an recourse debt REVERSED.9 benefit. WILLIAMS, Judge, Circuit JERRE S. above, Because, we have seri- indicated concurring: the decision, about ous reservations by our beyond the facts of result reached to extend I concur with the we decline position is case, Commissioner’s panel we therefore conclude that because the Obviously, argued our extin- appellants other in the alternative that 752(c) expressly any guishes real- the Commissioner limits the amount conflict Further, partnership provisions might of their in- ized from the transfer of 752. see 752(c) generally regarded fair market value terests securing to be an since see, Section 752 doctrine, the nonrecourse debt. intended codification of the Crane provides in full as follows: Perry Partnerships e.g., and Tax Shel- Limited Public, § 752. Treatment of certain liabilities Rule Goes 27 Tax ters: The Crane (a) partner’s Any (1972), Increase hold- L.Rev. it seems that our liabilities.— partner’s increase in a share liabilities congressional ing is consistent with under- partnership, any part- of a increase standing case. of the Crane ner’s individual liabilities reason partner assumption by partnеrship such holding is in conflict with our direct Because liabilities, circuits, shall be considered as contribu- we think the follow- decisions ing money by partner partner- tion of such necessary put in its remarks are case ship. First, important, proper perspective. and most (b) partner’s Any Decrease extremely precise liabilities.— issue before this court partner’s the liabilities decrease in a share of properly court includ- narrow: whether the tax any part- partnership, in a decrease debt ed full amount ner’s individual liabilities assumption by reason of the Congress specifically defined amount realized. partnеrship such indi- of any money to be the sum of amount realized liabilities, shall be considered as a dis- vidual tribution of partnership. prop- plus value of the received the fair market partner by (other money) erty received. I.R.C. than 1001(b). held that The Court has § (c) Liability subject.— to which is expanded eco- can be equivalent where an the definition section, liability purposes of For a to be to can identi- nomic benefit cash shall, subject which to the extent Significantly, taxpayers fied. whether property, of fair be market value of such properly of included the full amount liability as a of the owner of the considered partnership their debt in the bases of recourse in this case. interests not an issue (d) exchange an Sale or of interest. —In the the literature We detect in the caselaw and exchange or of in case of sale an interest legitimate potential abuses or concern for partnership, liabilities shall be treated in the through various least of the tax law misuses in same manner liabilities connection Friendly recently Judge tax shelter schemes. exchange or of not sale associat- stated: partnerships. ed with mortgages contribute to If non-recourse Notwithstanding unambiguous language of they property, be included must basis of then 752(c), the Commissioner contended that § Any other on its sale. amount realized Congress intended the fair market value limita- concept of basis course would render apply when tion of that subsection to by permitting of mort- sellers nonsensical or encumbered was contributed to register large gaged tax losses to partnership, distributed from a and that stemming basis and a dimin- from an infíated 752(d) operates independently somehow of § per- gain. It would also ished realization of 752(c). 752(c) provides a fair Because § depreciation conflicts, in excess of limitation, mit deductions necessarily market value which Commissiоner, real investment 752(d), holder’s according to the with § recaptured. subsequently never provides could which that liabilities associated 634 F.2d Estate of Levine exchange partnership interests the sale Bittker, 1980). supra (2nd note See also Cir. are as liabili- to treated the same manner identified, Judge Friendly we exchange 284-84. ties associated with sale or Crane less, case, law. plain In this we language inconsistent 1001(b) I.R.C. I 752(c). and I.R.C. review the effort to Commissioner’s extend company majority opinion with the because Crane plug doctrine a breach opinion it rests on a difference of with the potential flood dike back a of tax 1001 in Service over construction of § exaggerated employing de- shelter schemes light of the Crane doctrine. I doubt preciation ground- deduction ‍​‌‌​​‌​​‌​​‌​‌‌​‌‌‌​‌​‌‌​​‌​​‌‌​​‌​‌​​​​​‌​‌‌‌‌​‍and loss claims we Com- authority have down the strike financing-inflated ed on nonrecourse basis. interpretation missioner’s on the basis “poten- majority opinion The discusses this deci- “serious reservations about ruling, tial for abuse” inherent in our n.9 authorized, however, sion.” We are to in- supra, yet Commission- concludes regulations validate administrative solution, proposed er’s reflected Treas. they pur- conflict with the on which statute 1.1001-2(b) Reg. (1980), constitutes port to be basеd. unacceptable “distortpon the definition of] I majority’s understand the reluctance to of amount realized.” extend approach Court’s rigor logical With admiration for the ex- taxation of debt nonrecourse cancellation taken in Crane v. Commissioner. majority’s analysis Neverthe- hibited in the of this think, Finally, respond Judge primary two concerns that could we must Williams’ thoughtful prompt taxpayers concurring opinion. decision We do like Millar. The is that first think that the fair market limitation will be use fi- able to 1001(b) applies Judge nancing enjoy to this case. to inflate their bases order to Williams characterizes the release of nonrec- large the benefit of bear no tax deductions that (other “property ourse indebtedness money) than relationship to actual economic loss. meaning within received” appears nothing second to be more a con- expanded section. definition argument, suppose, cern for fairness. The we amount realized to include economic benefits equivalent is that isit somehow unfair for a view, intangible to cash. In our enjoy the benefit of substantial deductions equivalents “money” are cash more akin having without invested his own funds or “property.” Judge than liams is by But even Wil- placed own his assets at risk. regard, in this are correct we troubled agree potential that there exists a application freeing-of-assets theo- Judge Friendly correctly abuse. But also iden- ry. theory perfect That makes sense in the potential tified the reason that “non-re- exists: case recourse indebtedness: when recourse mortgages course contribute to the basis of extinguished, indebtedness is assumed or then, property.” problem, The real crux assets are “freed” the sense that the seller taxpayer’s ability manipulate is the his basis longer prospect losing faces the them to adjusted through basis the use of nonrec- contrast, proper- his creditor. In seems financing. solution, opinion, ourse in our subject ty to nonrecourse indebtedness is in no directly is to deal with the definitions “ba- actually relinquished sense “freed” “lost” trans- basis,” “adjusted judicially sis” and either ferred to or in satisfaction legislation. through See, e.g., Gibson Products. Further, debt. do with States, (N.D. F.Supp. Co. United v. 460 1109 Judge Williams’ fair conclusion that the market 1978)(nonrecourse Tex. indebtedness in excess “corresponds directly” value of the release with the fair market value of the securing of fair market value of the se- affirmed, basis), the debt cannot be included curing the nonrecourse indebtedness. As we (5th 1981); 637 F.2d 1041 Cir. Estate of Frank- text, noted Mrs. Crane benefited that a (9th lin v. 544 F.2d 1045 Cir. prerequisite recovery release was a $2500 of her 1976). It is not a solution distort the defini- equity. fair market value of the by finding tion of amount realized an economic release is a measure of that benefit. But be- equivalent benefit to cash where none exists. unpersuaded Crane, cause we remain that Mrs. basis, simply relationship

There is between recovering equity, in extent of “benefited” to the realized, adjustments basis, ex- and amount $255,000, we think the fair market cept Congress specifically legislated where something the release must be sub- recapture. response In to the notion that it stantially less. taxpayer enjoy is unfair for a benefit Judge We do Williams that acquired substantial only give weight deductions on great we whether Commissioner’s reject ‍​‌‌​​‌​​‌​​‌​‌‌​‌‌‌​‌​‌‌​​‌​​‌‌​​‌​‌​​​​​‌​‌‌‌‌​‍need funds, only with nonrecourse we may need state position or whether we only knows how to limit deductions it makes no it unreasonable actually places to amounts that the risk, see, e.g., difference. of our Because reservations about 465, Crane, yet logical underpinnings I.R.C. and has not done § we think so under the of this circumstances case. of it unreasonable. extension would be

1065 question dangling by footnote left 37 to take heed think it is essential problem, I opеrates under squarely our Court answered I.R.C. of the constraints aspect 1001(b), review an intricate when we which defines “amount realized” § by the In mechanism devised any money plus the enforcement “the sum of received - Revenue to administer ternal Service (other value of the fair market ignore adoption If we tax laws. (emphasis money) than received” 1.1001-2(b) during penden Treas.Reg. § Although expressly position asserted cy appeal1 of this and the characterizing avoided the taxable economic merely Internal Revenue Service benefit a transferor of receives interpretation, our Court an administrative subject to a non- when his transferee takes weight to the Com obliged give great prop as either recourse Compare position. United missioner’s 1054, 14, Judge erty, 331 67 S.Ct. at U.S. 1965) Fisher, (5th F.2d Cir. 353 396 States v. Hand in the same case lower Learned obliged give “great (appellate court is “it . .the court declared is the law. .that.. Treasury Department’s weight” to adminis would release nonrecourse indebtedness] [of Fire National trative construction (other re money) ‘property have been If, hand, recog Act). on the other we arms 111(b) meaning of § ceived’ within [now interpretation nize that the Commissioner’s Crane, 1101(b)].” v. Commissioner appeal оn has now been ele before us (2d 504, 1945). Combining F.2d 505 Cir. 153 may regulation, vated of a we to the status theory underlying the freeing-of-assets if it is unreasonable “only invalidate cases, see Unit cancellation of indebtedness statute.” Delta Met inconsistent with the Co., 1, 284 Kirby Lumber ed States v. U.S. Co., In v. Commissioner of alforming Inc. (1931), with the 76 L.Ed. S.Ct. Revenue, (5th F.2d Cir. ternal principle recourse and nonrec 1980) Judge Brown). In matters of (per alike under ourse indebtedness treated administration, we code construction fair market value release among choice must bear in mind that “[t]he val corresponds directly to the fair market is for the Com interpretations reasonablе securing the nonrecourse ue missioner, not National Muf the Courts. Therefore, 1001(b) impos indebtedness.3 States, Ass’n, fler Dealers Inc. United receipt liability for of a release es tax 472, 488, 1304, 1312, 59 L.Ed.2d U.S. indebtedness, nonrecourse regard view Whether prop of the fair market value extent ap on this advanced the Commissioner subject to erty transferred interpretation regula mere or a peal as a mortgage. case, the tion makes no difference. In this language the statute conflicts plain compelled by fair market The result position. the Service’s 1001(b) also com- value limitation of § involving partnership pelled in this cаse language of the Reliance on the literal 752(c), which inserts a by I.R.C. taxation precarious position, especially is a tax code on value limitation parallel fair market dealing Oaue-like situations.2 Nevertheless, mortgaged property within and to me that apparent seems transfers reckoning This echoes Court’s Treas.Reg. 1001-2(b) promulgated 3. was appended, language, to which Footnote 37 was December mortgagor, “we Crane: .think debt, of- 2. One commentator on the doctrine liable on the who sells fered property subject this admonition on tax code construction: for addi- and secondаry “Everyday meanings im- consideration, are realizes a benefit in tional portance construing the words of mortgage as well as the boot.” amount of the very any weight given are statute and seldom (footnote omit- 67 S.Ct. at 1054 331 U.S. at ted) meaning is when a more abstruse and technical (emphasis Adams, Exploring the Outer available.” Doctrine; Imagi- Boundaries the Crane nary Supreme Opinion, 21 L.Rev. Tax by partnership. Again, view Service’s 752(c) operates independently § Emsy Swaim, H. SWAIM and Annie 752(d), n.8, supra, § see is at war with the Plaintiffs-Appellees Cross

plain language of the statute. Subsection Appellants, (c) applies: purposes of this section.” “[f]or (d) Subsection 752—“this sec- § America, UNITED STATES of Defend tion.” Even if one adopt were to the Millar ant-Appellant Appellee. Cross view ignore the fair market value limi- 1001(b), tation of specific the clear and § No. 79-3244. imposition of a fair market ‍​‌‌​​‌​​‌​​‌​‌‌​‌‌‌​‌​‌‌​​‌​​‌‌​​‌​‌​​​​​‌​‌‌‌‌​‍value limitation United Appeals, States Court of 752(c) 752(d)’s § would control over § Fifth Circuit. general computation reference to the em- Unit A bracing the partner- 1001 definition in § ship taxation reading context. Our July 1001(b) justified is further because it does permit the development of disparity in the taxation partnerships opposed

to other business entities. 1001(b) result 752(c) compel

me to produces reach grave consequences equitable

for the administration of the tax

code. We certainty abandon the pre-

dictability of calculations based on amounts

specified in the nonrecourse in-

strument in favor of the concept elusive

fair decision, market value. Under our bor-

rowers personal liability receive less

favorable treatment than nonrecourse bor-

rowers on mortgaged property that declines

in value. While I.R.C. 465’s “at risk”

limitations on loss deduction from invest-

ments in certain speculative may ventures

curb potential for tax shelter abuses

employing financing,

does not reach real estate investments of

the sort transferred partner- the Tufts

ship. Our means that the Internal Revenue Service —or have —will

to retool the code mechanism policing

exaggerated depreciation and loss deduction grounded

claims on a basis inflated borrowing.

recourse Section 1001 and 752

simply do not authorize the administrative

solution the Service seeks to defend here.

Crane is correct and does not warrant a interpretation.

restrictive But the Commis-

sioner’s extension of Crane on review here directly

collides controlling statutory

language when the fair market value of the

property is less than the amount of the

adjusted base, i.e. the amount of the non-

recourse debt less the deductions taken.

Case Details

Case Name: John F. Tufts and Mary A. Tufts v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Jul 27, 1981

Citation: 651 F.2d 1058

Docket Number: 79-2258

Court Abbreviation: 5th Cir.