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Comm'r v. Tufts

Comm'r v. Tufts

Supreme Court of the United States

November 29, 1982, Argued ; May 2, 1983, Decided

No. 81-1536

Opinion

 [*301]  [***866]  [**1828]    JUSTICE BLACKMUN delivered the opinion of the Court.

 Over 35 years ago, in Crane v. Commissioner, 331 U.S. 1 (1947), [****6]  this Court ruled that a taxpayer, who sold property encumbered by a nonrecourse mortgage (the amount of the  [*302]  mortgage being less than the property's value), must include the unpaid balance of the mortgage in the computation of the amount the taxpayer realized on the sale. The case now before us presents the question whether the same rule applies when the unpaid amount of the nonrecourse mortgage exceeds the fair market value of the property sold.

On August 1, 1970, respondent  [***867]  Clark Pelt, a builder, and his wholly owned corporation, respondent Clark, Inc., formed a general partnership. The purpose of the partnership was to construct a 120-unit apartment complex in Duncanville, Tex., a Dallas suburb. Neither Pelt nor Clark, Inc., made any capital contribution to the partnership. Six days later, the partnership entered into a mortgage loan agreement with the Farm & Home Savings Association (F&H). Under the agreement, F&H was committed for a $ 1,851,500 loan for the complex. In return, the partnership executed a note and a deed of trust in favor of F&H. The partnership obtained the loan on a nonrecourse basis: neither the partnership nor its partners assumed [****7]  any personal liability for repayment of the loan. Pelt later admitted four friends and relatives, respondents Tufts, Steger, Stephens, and Austin, as general partners. None of them contributed capital upon entering the partnership.

The construction of the complex was completed in August 1971. During 1971, each partner made small capital contributions to the partnership; in 1972, however, only Pelt made a contribution. The total of the partners' capital contributions was $ 44,212. In each tax year, all partners claimed as income tax deductions their allocable shares of ordinary losses and depreciation. The deductions taken by the partners in 1971 and 1972 totalled $ 439,972. Due to  [**1829]  these contributions and deductions, the partnership's adjusted basis in the property in August 1972 was $ 1,455,740.

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461 U.S. 300 *; 103 S. Ct. 1826 **; 75 L. Ed. 2d 863 ***; 1983 U.S. LEXIS 27 ****; 51 U.S.L.W. 4518; 83-1 U.S. Tax Cas. (CCH) P9328; 51 A.F.T.R.2d (RIA) 1132

COMMISSIONER OF INTERNAL REVENUE v. TUFTS ET AL.

Prior History:  [****1]  CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT.

Disposition:  651 F.2d 1058, reversed.

CORE TERMS

mortgage, partnership, nonrecourse, fair market value, taxpayer, amount realized, proceeds, mortgagor, mortgagee, partnership interest, partner, depreciation, realized, repay, deductions, disposition of property, transactions, purchaser, encumbered property, adjusted basis, property value, third party, contributions, cancellation, outstanding, losses

Business & Corporate Law, Management Duties & Liabilities, Rights of Partners, General Overview, Tax Law, Sales & Exchanges, Installment Sales, Business Property, Federal Taxpayer Groups, Limited Liability Companies & Partnerships, Liabilities of Partnerships, Federal Income Tax Computation, Taxable Income, Capital Gains & Losses, Limited Partnerships, Allocations of Basis, General Partnerships, Losses & Profits, Basis, Basis of Partner Interests, Contributions to Partnerships, Income of Partners & Partnerships, Loss Deduction Limitations, Distributive Shares, Transfers of Interests, Basis of Transferred Interest, Causes of Action, Federal Tax Administration & Procedures, Fiduciaries & Transferees, Transferred Assets