COMMISSIONER V. TUFTS
461 U.S. 300 (1983)
NATURE OF THE CASE: This was a dispute over taxable gain on property subject to a
nonrecourse mortgage for greater than the property's fair market value.
FACTS: Pelt, was a builder and his wholly owned corporation, Clark, Inc. formed a general
partnership to construct a 120 unit apartment complex in a suburb of Dallas. Neither Pelt
nor Clark made any capital contributions to the partnership. The partnership then entered
into a mortgage of $1,851,500 in return for a deed of trust in favor of the lender. The loan
was obtained on a nonrecourse basis meaning that neither the partnership nor its partners
assumed personal liability for repayment. Pelt later got four general partners, Tufts,
Steger, Stephens and Austin. None of them contributed any capital upon entering the
partnership. Construction was completed in 1971 and the total capital contribution by the
partners was $44,212. In each tax year, all partners claimed income tax deductions for their
allocable share of ordinary losses and depreciation. The deductions taken in 1971 and 72
totaled $439,972. This made the adjusted basis for the property at $1,455,740. Things went
sour in the rental market because of major layoffs and each general partner sold his share
to Fred Bayles. As consideration, Bayles agreed to reimburse each partner's sale expenses up
to $250 and he also assumed the nonrecourse mortgage. The fair market value of the property
did not exceed $1,400,000. Each partner reported the sale and indicated that the partnership
had lost $55,740. The IRS determined that the gain was in fact $400,000 under the theory
that the partnership had realized the full amount of the nonrecourse obligation. The tax
court upheld, the Court of Appeals reversed.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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