Leo G. Ebben v. Commissioner Of Internal Revenue

Total deduction $ 875,416

The taxpayers claimed a deduction on their individual tax returns proportionate to their partnership interest in Whitney Farms.

The IRS disagreed with taxpayers' valuation, and asserted deficiencies in the various years in which the deductions were claimed. Specifically, the IRS asserted: (1) that the east tract had been overvalued by almost $1 million, and (2) that taxpayers' relief from the nonrecourse loan should be treated as a bargain sale to a charity resulting in taxable gain under I.R.C. Sec. 1011(b). Taxpayers then filed a petition in the tax court to redetermine the deficiencies; the tax court upheld the IRS's assessment.

II

We review the tax court's determination of property value under the clearly erroneous standard. Hokanson v. Commissioner, 730 F.2d 1245, 1249 (9th Cir.1984); United States v. McConney, 728 F.2d 1195, 1200 n. 5 (9th Cir.1984) (en banc), cert. denied, --- U.S. ----, 105 S.Ct. 101, 83 L.Ed.2d 46 (1985). Complex factual inquiries such as valuation require the trial judge to evaluate a number of facts: whether an expert appraiser's experience and testimony entitle his opinion to more or less weight; whether an alleged comparable sale fairly approximates the subject property's market value; and the overall cogency of each expert's analysis. Trial courts have particularly broad discretion with respect to questions of valuation.¹ The tax court's decision to analyze the gift of encumbered property as a bargain sale is reviewed de novo. McConney, 728 F.2d at 1201.

III

The IRS asserts that taxpayers overvalued the east tract in two ways. First, the portion of the east tract zoned "U" should be valued as farm land rather than a potential industrial site because agriculture was the highest and best use for the land on the transfer date. Second, taxpayers failed to prove that the portion of the east tract zoned "M" or "M-D" was worth more than the government's appraisal of $1,000 per acre. The tax court ruled for the IRS on both of these issues. We affirm the tax court's valuation of the portion of the east tract zoned "U" and reverse the tax court's decision with respect to the portion zoned "M" or "M-D".

* Treasury Regulation Sec. 1.170A-1(c)(2) defines the fair market value of property as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts."² Both parties cite this regulation approvingly, but they disagree as to the "relevant facts." The amount a "willing buyer" would pay for the subject property depends, of course, on the uses to which he may put the land. As of the transfer date, all but 75 acres of the east tract was zoned for agricultural or residential use. The tax court found agriculture to be the highest and best use for the land and assigned a value of $600 per acre.³

Taxpayers contend that the tax court's valuation is clearly erroneous because it conflicts with their evidence that the east tract will be rezoned for industrial uses. The appraisers hired by taxpayers considered the entire east tract to have industrial potential and valued it at $1,500 to $2,000 per acre.⁴ The tax court, however, relied on the alternative analysis put forth by the government's appraiser. The tax court found that the portion of the east tract zoned "U" had no industrial potential in the foreseeable future because: (1) a surplus of undeveloped industrial land existed in 1973 (only 10% of the designated industrial district had been developed); (2) testimony that county officials would have approved rezoning in 1977 was inadequate to show there would have been support for rezoning in 1973; and (3) the government's appraiser relied in part on two sales of land adjoining the industrial district, both of which had sold in the $600 range.⁵ On the basis of these facts, we hold that the tax court's decision to value the east tract as agricultural land is not clearly erroneous. We therefore affirm the tax court's value of $600 per acre for the portion of the east tract zoned for unclassified uses.

B

The parties also disagree as to the value of the 75 acres in the east tract zoned for industrial use. In five of the six consolidated cases the tax court ruled that this portion of the east tract was worth $1000 per acre. In the Ebben case, however, the tax court assigned a value of $1600 per acre to the same land. The tax court clearly erred in assigning a lower value to the same land in five of the six cases. We reverse the tax court in those five cases and hold that the 75 acres in the east tract zoned "M" or "M-D" should be valued at $1600 for each taxpayer.

By tax court rule, the value used by the IRS in its statutory notice of deficiency is presumed correct. T.Ct. Rule 142(a) (codified at 26 U.S.C. foll. Sec. 7453). The notices of deficiency mailed to the taxpayers in this case contained different values for the subject property.⁶ The tax court, however, chose not to rely on the presumed correctness of the notices of deficiency and instead assigned its own value to the 75 acres. Having decided to make an independent valuation, the tax court should have assigned just one value for the subject property.⁷

Our review of the record indicates that the evidence supports a value of $1600 per acre for the land zoned "M" or "M-D" in all of the six cases before us. We therefore reverse the tax court's decision to value the industrial portion of the east tract at $1000 per acre in five of the six cases.

IV

The second issue before us is how basis is to be computed upon the gift of the subject land to a charitable organization. We hold that a transfer by gift of encumbered property to a charity is a "sale" under section 1011(b).

Section 1001 states that "the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011...." I.R.C. Sec. 1001(a). Under section 1001, the phrase "other disposition of property" includes a gift of property. Treasury Regulation Sec. 1.1001-2(a)(4)(iii) provides: "A disposition of property includes a gift of the property or a transfer of the property in satisfaction of liabilities to which it is subject."

Taxpayers concede that the amount of the encumbrance on the property contributed to charity is an "amount realized." See Estate of Levine v. Commissioner, 72 T.C. 780, 789-91 (1979) aff'd, 634 F.2d 12, 15 (2d Cir.1980). Taxpayers also concede that the contribution to charity is a disposition of property which causes the amount of the encumbrance to be an "amount realized" by the taxpayers on such disposition. Thus, taxpayers realized $544,584 from the transfer of the property to Pitzer because the college took the land subject to a note and deed of trust in that amount. But taxpayers contend that "not every disposition of encumbered property to a charity is a 'sale' to the extent of the encumbrance, but will be considered a 'sale' only where the taxpayer directly or indirectly realized a benefit from such encumbrance." Taxpayers then limit "benefit" to receipt of cash when a loan is placed on the property prior to the contribution or deduction of depreciation with respect to the amount of the encumbrance which had been included in taxpayers' basis under Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947). We hold that every contribution of mortgaged property to charity is a "sale" and basis is computed under section 1011(b).⁸

Taxpayers assert that in this case their basis is calculated under paragraph (a) of section 1011 which states that adjusted basis is historical cost minus some adjustments which are not relevant in this case. Under section 1011(a), the taxpayers' adjusted basis is the purchase price of the property, $548,000 ($3,416 cash plus a $544,584 mortgage). There was no adjustment for depreciation because the subject property was unimproved. Taxpayers therefore contend that the donation of the property to Pitzer did not give rise to taxable gain because the amount realized ($544,584) was less than the adjusted basis of the property ($548,000).

The IRS, on the other hand, contends that paragraph (b) of section 1011 controls the basis calculation. Section 1011(b) provides:If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property. (Emphasis added.)

Under this paragraph, taxpayers realize taxable gain because the amount realized ($544,584) exceeds the allocated basis ($506,679).⁹

As stated above, the issue before us is whether the gift of mortgaged property to a charity is a "sale" under section 1011(b). Taxpayers assert that because section 1011(b) uses the word "sale" rather than the term "sale or other disposition" used elsewhere in the Code, Congress intended to limit the scope of section 1011(b) to cases in which the taxpayer received a benefit such as cash on mortgaging the property or depreciation deduction with respect to the property prior to transferring it to the charity.

The Supreme Court in Commissioner v. Tufts, 461 U.S. 300, 307-310, 103 S.Ct. 1826, 1831-1832, 75 L.Ed.2d 863 (1983), however, established that taxation on relief from debt under Crane does not depend on any theory of economic benefit and applies to situations in which no depreciation deductions have been taken. The Court stated:

This, however, does not erase the fact that the mortgagor received the loan proceeds tax-free and included them in his basis on the understanding that he had an obligation to repay the full amount.... When the obligation is canceled, the mortgagor is relieved of his responsibility to repay the sum he originally received and thus realizes value to that extent within the meaning of Sec. 1001(b). From the mortgagor's point of view, when his obligation is assumed by a third party who purchases the encumbered property, it is as if the mortgagor first had been paid with cash borrowed by the third party from the mortgagee on a nonrecourse basis, and then had used the cash to satisfy his obligation to the mortgagee.

Tufts, 461 U.S. at 312, 103 S.Ct. at 1834 (citation omitted). When the taxpayers in this case gave the subject property to Pitzer College, which took the property subject to the debt, it was as if the taxpayers had been paid with cash borrowed by Pitzer College from the mortgagee on a nonrecourse basis, and then had used the cash to satisfy their obligation to the mortgagee. "When a taxpayer receives a loan, he incurs an obligation to repay that loan at some future date. Because of this obligation, the loan proceeds do not qualify as income to the taxpayer. When he fulfills the obligation, the repayment of the loan likewise has no effect on this tax liability." Tufts, 461 U.S. at 307, 103 S.Ct. at 1831. But when someone else relieves him of his obligation to pay the loan, it is as though the taxpayer had received cash and the transfer of the encumbered property to the charity is the equivalent of a sale without regard to any tax benefit theory. See Commissioner v. Peterman, 118 F.2d 973 (9th Cir.1941) (transfer held to be "sale or exchange" within meaning of capital gains provisions even though transferor received no economic benefit); Freeland v. Commissioner, 74 T.C. 970, 977 (1980) (same).

The tax court, in a decision unanimously reviewed by the full court, has specifically held that a gift of encumbered property to a charity is a "sale" as that term is used in section 1011(b). Guest v. Commissioner, 77 T.C. 9 (1981). The taxpayer in Guest donated mortgaged property to a charity. The court held that the gift resulted in taxable gain and the basis used to determine gain was an allocated basis calculated under section 1011(b). Guest, 77 T.C. at 24-26 & n. 12.

The tax court concluded that there was a sale under section 1011(b): "we are convinced that [taxpayer's] charitable contribution of the properties must ... be treated as a sale or exchange." Guest, 77 T.C. at 25. In reaching this conclusion, the tax court relied on Freeland v. Commissioner. "We believe the holdings of Crane and subsequent cases decided in the light of Crane mandate the conclusion that relief from indebtedness, even though there is no personal liability, is sufficient to support a sale or exchange." 74 T.C. 970, 981 (1980) (emphasis in original). The Guest court then concluded that section 1011(b) applies "to both sales and exchanges, despite the sole use of the word sale in the statute." 77 T.C. at 25 (citing Treas.Reg. Secs. 1.1011-2(a)(1) & 1.1011-2(a)(3) ).

The IRS has consistently interpreted "sale" in section 1011(b) to include gifts of mortgaged property to a charity. Treasury Regulation Sec. 1.1011-2(a)(3) states:

If property is transferred subject to an indebtedness, the amount of indebtedness must be treated as an amount realized for purposes of determining whether there is a sale or exchange to which section 1011(b) and this section apply, even though the transferee does not agree to assume or pay the indebtedness.

Taxpayers contend that this regulation should be read to cover only "disguised sales," rather than all gifts of mortgaged property. A disguised sale occurs when the taxpayer mortgages the property just prior to giving it to a charity. In such a case, the donor receives the cash proceeds of the loan and the charity receives the property subject to the debt. However, the Commissioner in Rev.Rul. 81-163, 1981-1 C.B. 433, made it clear he did not intend to limit the regulation to disguised sales. In Rev.Rul. 81-163 a taxpayer transferred property with a basis of 15x and a fair market value of 25x to a charity. The property was subject to a mortgage of 10x, and the charity accepted the property subject to the debt. These facts are identical to the case before us: the property's fair market value exceeds the basis, and the basis exceeds the amount of indebtedness. Rev.Rul. 81-163 concludes that the taxpayer must allocate the basis of the property under section 1011(b).¹⁰

Taxpayers maintain that the IRS's interpretation of section 1011(b) in Treas.Reg. Sec. 1.1011-2(a)(3) exceeds the scope of the statute. Our review of the Commissioner's regulations is strictly limited. We may set aside Treas.Reg. Sec. 1011-2(a)(3) only if it is not a reasonable interpretation of section 1011(b). "The choice among reasonable interpretations is for the Commissioner, not the courts." National Muffler Dealers Association v. United States, 440 U.S. 472, 488, 99 S.Ct. 1304, 1312, 59 L.Ed.2d 519 (1979). Treasury regulations are valid if they "implement the congressional mandate in some reasonable manner." United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 450, 19 L.Ed.2d 537 (1967). "In determining whether a particular regulation carries out the congressional mandate in a proper manner, we look to see whether the regulation harmonizes with the plain language of the statute, its origin, and its purpose." National Muffler, 440 U.S. at 477, 99 S.Ct. at 1307.

The plain language of section 1011(b) applies to sales to a charitable organization. Neither the code nor the regulations, however, define the word sale directly.¹¹ This distinguishes the case before us from the Supreme Court cases cited by the taxpayers which have invalidated Treasury regulations because they were inconsistent with terms already defined by Congress. See, e.g., United States v. Vogel Fertilizer Co., 455 U.S. 16, 25-26, 102 S.Ct. 821, 827-28, 70 L.Ed.2d 792 (1982) (regulation inconsistent with "brother-sister controlled group" because term defined specifically by the code); Rowan Companies, Inc. v. United States, 452 U.S. 247, 254-58, 101 S.Ct. 2288, 2293-95, 68 L.Ed.2d 814 (1981) (regulation which defined "wages" to include value of meals and lodging in oil rig employees' salaries invalid because code definition of wages excluded these items).

In the absence of specific direction from Congress, we find that the Commissioner's regulation interpreting section 1011(b) is reasonable.¹² The congressional mandate embodied in section 1011(b) is to offset the "combined effect ... of not taxing the appreciation and at the same time allowing a charitable contributions deduction for the appreciation." H.R.Rep. No. 413, 91st Cong. 1st Sess. 53, reprinted in 1969-3 C.B. 200, 234, U.S.Code Cong. & Admin.News 1969, p. 1699. Treasury Regulation Sec. 1.1011-2(a)(3) thus harmonizes with the origin and purpose of section 1011(b).¹³

On balance, the cases, Treasury regulations, and revenue rulings support the tax court's conclusion that taxpayers realized gain. Accordingly, we hold that a charitable contribution which entails relief from nonrecourse indebtedness is a "sale" within the meaning of section 1011(b).

AFFIRMED in part and REVERSED in part.

BEEZER, Circuit Judge, concurring in part and dissenting in part.

I concur in parts I, II, and III of the majority opinion as regards the statement of facts, standard of review, and the proper valuation of the land donated by the taxpayers to Pitzer College, a charitable organization under section 170. Because I do not agree that this gift of encumbered land constitutes a bargain sale under section 1011(b), requiring the allocation of the basis between the portion "sold" and the portion contributed to the charity, I respectfully dissent from part IV of the opinion.

On the date of the transfer to Pitzer College, taxpayers' property had an adjusted basis of $548,000 and secured an outstanding obligation of $544,584.¹ The land was donated to Pitzer College subject to the note and deed of trust, which was without recourse against the taxpayers. Whether a gift of encumbered property to a charitable organization gives rise to a taxable gain under section 1011, even when the adjusted basis of the property exceeds the amount of the debt and when the taxpayers have received no economic benefit through relief from the encumbrance, is a matter of first impression in the courts of appeals. Statutory interpretation of the Internal Revenue Code involves a question of law reviewed de novo. Dumdeang v. Commissioner, 739 F.2d 452, 453 (9th Cir.1984).

Taxpayers concede that the disposition of the encumbered land through the contribution to Pitzer College resulted in an "amount realized" to the extent of the indebtedness under 26 U.S.C. Sec. 1001. See Estate of Levine v. Commissioner, 634 F.2d 12 (2d Cir.1980) (in computing gain or loss from the "sale or other disposition" of property as the difference between the amount realized and the adjusted basis of the property, the amount of the encumbrance debt on gifted property constitutes amount realized), aff'ming 72 T.C. 780 (1979). The dispute in this case centers on the application of the basis provisions of section 1011. 26 U.S.C. Sec. 1011.

Taxpayers contend that because the total adjusted basis exceeds the amount of the indebtedness (amount realized), taxpayers have not realized a taxable gain from the disposition of the encumbered land. See Sec. 1011(a).

The Tax Court held, and the Internal Revenue Service argues before us, that a partial basis approach should be applied according to the allocation formula set forth in section 1011(b):

If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.

This "bargain sale" provision of Sec. 1011(b) was adopted by Congress in 1969 to address, in part, the problem raised by the combined effect of not taxing the appreciation in value of property, and at the same time allowing a charitable contributions deduction for the entire amount of the appreciation. H.Rep. No. 413, 91st Cong., 1st Sess. (1969), reprinted in, 1969 U.S.Code Cong. & Ad.News 1645, 1699; 2 B. Bittker, Federal Taxation of Income, Estates and Gifts Sec. 35.2.4, at 35-21 (1981). Prior to 1969, if a taxpayer sold appreciated property to a charitable organization at a price equal to the cost basis, the entire appreciation could be taken as a deduction and no tax was assessed on the gain. 1969 U.S.Code Cong. & Ad.News at 1699; Jackson, The New Rules Governing Bargain Sales to Charitable Organizations Under the Tax Reform Act of 1969, 24 Tax Lawyer 279, 279 (1971).

The "bargain sale" provision treats a charitable contribution as part sale, part gift, allocating the basis between the two separate elements of the transaction. The application of this statutory provision is particularly important in a situation where the amount realized by a bargain sale to a charitable organization is less than the adjusted basis. Ordinarily this would result in no gain at all; but with the allocation of the basis under the section 1011(b) formula, some gain will be realized if the property has appreciated. In the instant case, the Service applied section 1011(b) to the taxpayers' transaction as follows:²

By contending that section 1011(b) applies to the taxpayers' transaction in this case, the Service is arguing that all gifts of property subject to encumbrance must be considered a "sale" under that section to the charitable organization for the amount of the indebtedness. Rev.Rul. 81-163, 1981-1 C.B. 433. The Tax Court has adopted this approach. Guest v. Commissioner, 77 T.C. 9, 24-26 (1981). I cannot conclude that Congress intended every transfer of encumbered property to a charity to be deemed a "sale," regardless of whether there is any indicia of a "sale," such as a direct economic benefit received by the transferor.

If Congress had intended section 1011(b) to have so broad an application, Congress would not have adopted the narrow term "sale" in its drafting of this statutory provision. By contrast, in several other sections of the Internal Revenue Code, when Congress intended a provision to govern other types of transfers, the language "sale or other disposition" has been enacted. See, e.g., Secs. 1001(a), 1001(b), 1011(a). The Internal Revenue Code is a complex and intricate statutory compilation governing complex financial transactions. We must assume that Congress carefully selected and intentionally adopted the language enacted into federal tax law. By selecting the term "sale" in section 1011(b), Congress cannot be deemed to have intended something different. It is not the province of this court or the Tax Court below to conclude that Congress mistakenly enacted narrow language or absent-mindedly forgot to include language of broader application.³

Adopting a narrower interpretation of section 1011(b) than that suggested by the Service would not preclude practical applications of the provision to govern those transactions which are in substance a "sale," although in form an exchange or other disposition. It does not do violence to the plain language of the statute to hold that a taxpayer may not avoid the basis allocation provision of section 1011(b) through a disguised sale, such as by receiving the proceeds of a money loan secured by appreciated property and then transferring the property to a charity subject to the debt. See Jackson, supra, 24 Tax Lawyer at 281. In such a case, the taxpayer has received a direct economic benefit by reason of the transaction. This type of disposition is properly regarded as a bargain sale to the charitable organization.

The question remains in the instant case whether any sale or exchange has occurred. See Jackson, supra, 24 Tax Lawyer at 280. The taxpayers in the instant case have not received any economic benefit as a result of the transfer of the land subject to the encumbrance.⁴ They did not receive the proceeds from the loan, as it arose as a purchase money encumbrance. They are not relieved of any personal liability by the transfer of the land to the college, as it was a nonrecourse loan.⁵ Nor could they deduct any depreciation with respect to the amount of the encumbrance as the property was unimproved.⁶

It is true that the taxpayers have realized a benefit of sorts by reason of the nonrecourse encumbrance, in that it facilitated speculation in land at little risk. With a minimal cash downpayment, the nonrecourse loan allowed the taxpayers to hold the property with little danger of loss or liability. Had the land depreciated in value, the taxpayers could have allowed it to be foreclosed at little actual loss to themselves. When the property instead appreciated in value, the taxpayers had the choice of selling the property and recognizing the gain or contributing the property to a charitable organization and claiming a deduction under section 170.

This, however, was a benefit realized by reason of the existence of the nonrecourse encumbrance as a financing method, not by reason of relief from the encumbrance through a transfer of the land subject to it. The intangible benefits of low-risk nonrecourse financing to investors in land is not the type of economic benefit that is so analogous to a "sale," as to make section 1011(b) applicable.

The Service relies on Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947), as authority for the proposition that an economic benefit is obtained by the discharge of a nonrecourse mortgage. In Crane, the Supreme Court held that a taxpayer, who sold property subject to a nonrecourse encumbrance, must include the value of the indebtedness in the computation both of the adjusted basis and of the amount realized upon the sale.

The primary ground for the Court's decision was the impracticality of considering the taxpayer's equity as the "property" interest for the determination of the basis, particularly in computing depreciation, because the equity constantly changes with amortization of the mortgage. Id. at 9-10, 67 S.Ct. at 1052; see also Commissioner v. Tufts, 461 U.S. 300, 305, 307, 103 S.Ct. 1826, 1830-1831, 75 L.Ed.2d 863 (1983); 2 B. Bittker, Federal Taxation of Income, Estates and Gifts Sec. 35.2.4, at 43-19 (1981). (In fact, the taxpayer in Crane had claimed some $25,000 depreciation based on a basis of $250,000, which included the amount of the nonrecourse debt when the taxpayer inherited the property. 331 U.S. at 4.) As Bittker puts it, "The Court's interpretation of IRC Sec. 1001(b) [on amount realized] was, in essence, a by-product of the taxpayer's $250,000 date-of-death basis for the property and her concomitant right to compute depreciation on that basis." B. Bittker, supra, Sec. 43.5.2, at 43-19. See also Estate of Levine v. Commissioner, 634 F.2d 12, 15 (2d Cir.1980).

However, the Supreme Court went beyond this ground of administrative simplicity justifying inclusion of nonrecourse indebtedness in the amount realized, to also reason that a transfer subject to a nonrecourse mortgage results in a benefit to the transferor that is "as real and substantial" as if a personal debt were assumed by another. 331 U.S. at 14. The Service argues that this holding is authority for its conclusion that the taxpayers in the instant case have received an economic benefit such that the transaction should be considered a "sale" subject to section 1011(b).

The economic benefit rationale of Crane has been the subject of severe criticism as both unpersuasive and unnecessary to the result. E.g., B. Bittker, supra, Sec. 43.5.2, at 43-21; Adams, Exploring the Outer Boundaries of the Crane Doctrine: An Imaginary Supreme Court Opinion, 21 Tax L.Rev. 159, 169-70, 175-76 (1966); see Estate of Levine, 634 F.2d at 15 & n. 6. As Bittker explains:

The Court was right, of course, in asserting that owners of mortgaged property must keep up the payments if they want to retain the property and that for this period of time they must treat mortgages as personal obligations whether they are personally liable or not; but it does not follow that the "benefit" to such taxpayers from transferring the property subject to the mortgage is the same in both cases....

....

... Relief from a nonrecourse debt is not an economic benefit if it can be obtained only by giving up the mortgaged property. It is analogous to the relief one obtains from local real property taxes by disposing of the property: Like nonrecourse debt, the taxes must be paid to retain the property; but no one would suggest that the disposition of unprofitable property produces an economic benefit equal to the present value of the taxes that will not be paid in the future.

B. Bittker, supra, Sec. 43.5.2, at 43-20 to 43-21 (emphasis in original).

The Supreme Court itself has recently backed away from this economic benefit reasoning. In Tufts v. Commissioner, 461 U.S. 300, 103 S.Ct. 1826, 75 L.Ed.2d 863 (1983), the Court extended the result in Crane to a sale where the unpaid amount of the nonrecourse mortgage exceeded the fair market value of the property. In such a case, the landowner clearly does not have any incentive to maintain payments on the mortgage. Thus, under the Crane Court's reasoning, there is no benefit obtained by keeping up payments, such that relief from the nonrecourse debt would be analogous to a discharge of personal liability.⁷ However, the Supreme Court held that the result in Crane still applied to this situation, stating:

Crane ultimately does not rest on its limited theory of economic benefit; instead we read Crane to have approved the Commissioner's decision to treat a nonrecourse mortgage in this context as a true loan. This approval underlies Crane's holdings that the amount of the nonrecourse liability is to be included in calculating both the basis and the amount realized on disposition. That the amount of the loan exceeds the fair market value of the property thus becomes irrelevant.

Id. at 307, 103 S.Ct. at 1831. See also B. Bittker, supra, Sec. 43.5.2, at 43-19.

The Court thus grounded its holding in Tufts on the practical implications noted in Crane, particularly that by including the amount of the nonrecourse debt in the calculation of the basis, the taxpayer is permitted to take depreciation deductions on that full amount. See Tufts, 461 U.S. at 309 & n. 7, 103 S.Ct. at 1832 & n. 7. As the basis is computed on the assumption that the taxpayer is obligated by the amount of the indebtedness, it naturally follows that the amount realized must reflect the indebtedness, subject to which the property is transferred. In addition, the Court noted that, because the amount of the nonrecourse debt is included in the basis, permitting the taxpayer to limit his realization to the fair market value of the property (where the debt exceeds that basis amount) would allow the taxpayer to recognize a tax loss on the sale for which he has suffered no corresponding economic loss. Id. at 313, 103 S.Ct. at 1834.

Even were the Supreme Court to reaffirm the economic benefit reasoning in Crane today in its interpretation of section 1001 governing the calculation of the amount realized, which appears unlikely, I do not believe the Court would extend that artificial rationale to the very different context of section 1011(b) to determine whether a bargain "sale" has occurred. Contra Guest v. Commissioner,