Tax Court Case Analysis

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.The fair market value of the property at the time of sale was $1,400,000, so they claimed a loss of $55,740. 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.
Issues:1) 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?
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 received.” (Tuft Case 1983)
The Court reaffirmed that the holding of a previous opinion rendered in Crane v. Commissioner (1934); specifically that a taxpayer must incorporate the amount of mortgage debt liability transferred when calculating “amount realized” in a property