The Unanswered Question in Tufts: What Was the Purchaser’s Basis?
82 Pages Posted: 30 Apr 2009
Date Written: 1991
Decided by the Supreme Court in 1983, Tufts v. Commissioner answered the question left open by the famous footnote 37 in Crane v. Commissioner (1947): when property encumbered by a nonrecourse liability is disposed of, it makes no difference in determining amount realized that the property’s value has declined substantially below the amount of the outstanding principal. As long as the nonrecourse obligation was a true loan to begin with, Crane stands for the proposition that the full amount of the obligation should be included in amount realized. Tufts, however, did not address how such a liability (i.e., one greater than the value of the property nominally securing the property) should be treated in the hands of the property’s purchaser - whether the Crane basis rule permits including the entire amount of the liability in basis; whether the basis should be limited to the property’s fair market value; or whether the basis should be zero on the ground that, for the purchaser, the liability is not a true loan at all. This article considers the three possibilities and comes out in favor of the last one.
Keywords: Tufts v. Commissioner, Crane v. Commissioner, Property, Fair Market Value, Nonrecourse Liability, Purchaser’s Basis, Taxation
JEL Classification: K34
Suggested Citation: Suggested Citation