26 U.S.C.S. § 752(d) specifically provides that liabilities involved in the sale or exchange of a partnership interest are to be treated in the same manner as liabilities in connection with the sale or exchange of property not associated with partnerships. 26 U.S.C.S. § 1001governs the determination of gains and losses on the disposition of property. Under § 1001(a), the gain or loss from a sale or other disposition of property is defined as the difference between the amount realized on the disposition and the property's adjusted basis. Subsection (b) of § 1001 defines amount realized as 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.
A general partnership obtained a nonrecourse mortgage loan of $ 1,851,500 in order to construct an apartment complex. The partnership was not unable to make the payments due on the mortgage, and each partner sold his partnership interest to an unrelated third party who assumed the nonrecourse mortgage. On the date of transfer, the fair market value of the property did not exceed $ 1,400,000 and the partnership's adjusted basis in the property was $ 1,455,740. Each partner reported the sale on his federal income tax return and indicated that a partnership loss of $ 55,740 had been sustained. The Commissioner of Internal Revenue determined that the sale resulted in a partnership capital gain of approximately $ 400,000 on the theory that the partnership had realized the full amount of the nonrecourse obligation. The United States Tax Court upheld the asserted deficiencies (70 TC 756). The United States Court of Appeals for the Fifth Circuit reversed (651 F2d 1058).
Should a taxpayer who sells property encumbered by nonrecourse mortgage exceeding fair market value of property sold be required to include unpaid balance of mortgage in computation of amount that the taxpayer realized on sale?
The court determined that it was irrelevant that there was no economic benefit, since under the Internal Revenue Code, the value of the mortgage was relieved, and thus was a taxable benefit to respondents. In an opinion by Blackmun, J., expressing the unanimous view of the court, it was held that a taxpayer who sells property encumbered by a nonrecourse mortgage exceeding the fair market value of the property sold must include the unpaid balance of the mortgage in the computation of the amount the taxpayer realized on the sale.