Commissioner v. Tufts

Commissioner v. Tufts
Supreme Court of the United States
Argued November 29, 1982 Decided May 2, 1983
Full case name	Commissioner of Internal Revenue v. Tufts, et al.
Citations	461 U.S. 300 (more) 103 S. Ct. 1826, 75 L. Ed.2d 863 (1983)
Prior history	70 T.C. 756 (1978), reversed by 651 F.2d 1058 (5th Cir. 1981)
Holding
When a taxpayer sells or disposes of property encumbered by a nonrecourse obligation exceeding the fair market value of the property sold, the Commissioner may require him to include in the “amount realized” the outstanding amount of the obligation.
Court membership
Chief Justice Warren E. Burger Associate Justices William J. Brennan, Jr. · Byron White Thurgood Marshall · Harry Blackmun Lewis F. Powell, Jr. · William Rehnquist John P. Stevens · Sandra Day O'Connor
Case opinions
Majority	Blackmun, joined by unanimous court
Concurrence	O'Connor
Laws applied
26 U.S.C. § 1001(b)

Commissioner v. Tufts, 461 U.S. 300 (1983), was a unanimous decision by the United States Supreme Court, which held that when a taxpayer sells or disposes of property encumbered by a nonrecourse obligation exceeding the fair market value of the property sold, the Commissioner of Internal Revenue may require him to include in the “amount realized” the outstanding amount of the obligation; the fair market value of the property is irrelevant to this calculation.

Facts

Taxpayers borrowed $1,851,500 on a non-recourse basis to build an apartment complex.

When their basis in the property was $1,455,740 (after their invested capital of $44,212 and deductions taken in the amount of $439,972), they sold it for no consideration other than the assumption of the non-recourse liability.^[1]

The fair market value of the property at the time of sale was $1,400,000, so they claimed a loss of $55,740.^[2] The Tax Commissioner insisted instead that they actually realized a gain of $400,000; the difference between the principal amount of the debt and their basis.^[2]

Issue

How should the tax court deal with the transfer of non-recourse mortgage debt in property dispositions when the fair market value of the property is less than the property’s basis?

Opinion

The Court began by noting that all gains or losses on the disposition of property must be realized, under section 1001(a) of the Internal Revenue Code.^[3] The definition for “amount realized,” found in 1001(b), states “the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.”^[4]

The Court considered, and ultimately reaffirmed, the holding of a previous opinion rendered in Crane v. Commissioner; specifically that a taxpayer must incorporate the amount of mortgage debt liability transferred when calculating “amount realized” in a property disposition.^[5]

In doing so, the Court stated that the amount of non-recourse liability (mortgage debt) is to be included in calculating both the basis and the amount realized in property on disposition, preventing the potential problem of a mortgagor receiving untaxed income unaccounted for by an increased basis in property.^[6]

The Court specifically noted that the fair market value of the property at the time of disposition is irrelevant.^[6] Further, the nature of the loan (recourse or non-recourse) is also insignificant for purposes of determining basis.^[7] The Court defended its position by observing that the stated requirements force a taxpayer to account for the proceeds of obligations he has received tax-free and included in the property’s basis. ^[8] A finding otherwise would allow a mortgagee to recognize a tax loss without suffering a corresponding economic loss.^[9]

In applying the opinion’s statement of law to the present facts, the Court concluded that the taxpayers’ disposition of property realized a gain of approximately $400,000; not their claim of a $55,740 loss.^[10]

See also

• List of United States Supreme Court cases, volume 331
• Taxation in the United States

References

1. ^ Commissioner v. Tufts, 461 U.S. 300 (1983).
2. ^ ^{a b} Tufts at 300.
3. ^ Tufts at 304; see also 26 U.S.C. § 1001(a).
4. ^ Tufts at 304; see also 26 U.S.C. § 1001(b).
5. ^ Tufts at 304-307; see also Crane v. Commissioner, 331 U.S. 1 (1947).
6. ^ ^{a b} Tufts at 307.
7. ^ Tufts at 308.
8. ^ Tufts at 312.
9. ^ Tufts at 313.
10. ^ Tufts at 317.

Further reading

• Cunningham, Alice (1984). "Payment of Debt with Property—The Two-Step Analysis after Commissioner v. Tufts". Tax Lawyer 38: 575. ISSN 08904898. 
• Pino-Anderson, E. (1982). "Contra Tufts: The Case against the Fair Market Value Limitation on Amount Realized". Pacific Law Journal 14: 79. ISSN 00308757.