## Facts

- Individual partners formed a general partnership to construct and operate an apartment complex.
- The partnership financed construction with a $1,851,500 nonrecourse mortgage.
- After completion, the partnership claimed deductions, including depreciation, resulting in an adjusted basis of $1,455,740.
- Rental income declined, and the partnership could not service the mortgage.
- The partners sold their partnership interests to a third party who assumed the nonrecourse mortgage.
- At disposition, the property’s fair market value did not exceed $1,400,000, which was less than the outstanding mortgage balance.
- The partners reported a partnership loss by treating the amount realized as the property’s fair market value.
- The Commissioner determined that the amount realized included the full unpaid nonrecourse mortgage, producing gain and resulting deficiencies.
- The Tax Court upheld the Commissioner; the Fifth Circuit reversed; the Supreme Court granted review.

## Issues

1. Whether, upon disposition of property encumbered by nonrecourse debt exceeding fair market value, the “amount realized” under I.R.C. § 1001(b) includes the full unpaid balance of the nonrecourse obligation or is limited to fair market value.

## Decision

- The Supreme Court reversed the Fifth Circuit and reinstated the Commissioner’s approach.
- The Court held that the amount realized includes the entire outstanding balance of the nonrecourse obligation, even when it exceeds the property’s fair market value.
- The Court treated the transfer with assumption of the nonrecourse debt as relieving the taxpayer of the obligation in a way that constitutes value received under § 1001(b).
- The Court relied on consistency between including nonrecourse debt in basis on acquisition and including the same debt in amount realized on disposition.
- In the partnership setting, the Court applied the same rule through I.R.C. § 752(d), treating assumed partnership liabilities in the same manner as liabilities tied to direct property dispositions.

## Legal Principles

- Under I.R.C. § 1001, gain or loss is computed by subtracting adjusted basis from the amount realized on sale or other disposition.
- When a taxpayer disposes of property subject to a nonrecourse obligation that the transferee assumes or takes subject to, the amount realized includes the full unpaid amount of the nonrecourse debt.
- The property’s fair market value does not cap the amount realized when the nonrecourse debt exceeds that value.
- Because nonrecourse borrowing is treated as a genuine loan for basis and depreciation purposes, symmetry requires inclusion of the same obligation in the amount realized upon disposition.
- The rule prevents recognition of tax losses that would arise from treating nonrecourse debt as inflating basis while excluding that debt from amount realized when the property is transferred.

## Conclusion

The Court held that disposing of property encumbered by nonrecourse debt requires inclusion of the full unpaid debt in the amount realized, regardless of the property’s fair market value, ensuring consistent treatment of nonrecourse financing in basis and disposition computations, including in partnership transactions.


Commissioner v. Tufts, 461 U.S. 300 (1983)