Crane v. Commr

1
Crane v. Commr
fmv at death 2
50,000 nonrecou
rse mortgage 250,000

operated as rental property for 7
years depreciati
on on building 30,000 What is Mrs. Cranes b
asis in the building?
H
bequest
W Mrs. Crane
2
Mrs. Cranes Adjusted Basis
Original basis 250,000 (1014
fmv at death) less adjustments
30,000 (1016 adjustment for depreciation)
Adjusted
Basis 220,000
3
Sale to
Third Party transfer of b
uilding
subject to
250,000 mortgage
and 2,500 cash (boot)

Mrs. Crane
buyer
4
1001 Gain
Mrs. Cranes position
IRS Position AR 2,5
00 (cash only) 252,500 (cash mortgage)
AB 0 (equity)
220,000 (1014 basis as adjusted)
Gain 2,500
32,500

2,500
30,000
capital gain
depreciation
recapture
5
Commr v.
Tufts Original Purchase

transfer of building nonrecour
se mortgage lien 1,850,000
Seller
Buyer Tufts and partners
6

Partners adjusted basis Or
iginal basis 1,850,000 (1012 cost,
including mortgage) less
400,000 (1016 adjustment for
depreciation) Adjusted Basis
1,450,000
7
Sale to Third Party
fmv transfer of building fmv 1,400,000 AB
1,450,000
Buyer - Fred Bayles
Tufts partners
subject to 1,850,000 mortgage
8
1001 Gain Taxpayers posi
tion IRS
Position AR 1,400,000 (limited to bu
ilding fmv) 1,850,000 (full
mortgage) AB 1,450,000 1,450,00
0 ( 50,000)
400,000
loss
gain
deprec
iation recapture argumen
t based on Crane fn. 37
9
Bifurcation
Approach Part Discharge
Part Sale AR 1,850,00
0 (full debt)
1,400,000 (fmv of property transferred)
AB 1,400,000 (fmv property transferred)
1,450,000 (adjusted basis in
property) 450,000 (
50,000) gain

loss
discharge of debt
loss from sale
ordinary income
possibly capital
loss
net gain 400,000
10
Treas. Reg. 1001-2(c), ex (1) Assumption of
Recourse Note
1,000 cash
9,000 recourse loan

Original purchase price 10,000
Original basis Original
Debt 10,000 9,000
less 3,100 (depreciation)
1,400 (principal payments)
AB 6,900 remainin
g debt 7,600
11
Sale of asset for cash assumption of recourse
mortgage
fmv debt case
Buyer
TP (seller)
asset fmv 9,200
1,600 cash 7,600 assumption of remaining liab
ility (recourse)
9,200
1001 Gain AR 9,200 less AB 6,900
2,300

12
Treas. Reg. 1001-2(c), ex (2)

Assumption of Nonrecourse Note Crane facts
1,000 cash
9,000 nonrecourse loan

Original purchase price 10,000
Original basis Original
Debt 10,000 9,000 less
3,100 (depreciation)
1,400 (principal payments) AB 6,900
remaining debt 7,600
13
Sale of asset for cash assumption of
nonrecourse mortgage
still fmv debt case (Crane)
TP (seller)
Buyer
asset fmv 9,200
1,600 cash 7,600 assumption of remaining liab
ility (nonrecourse)
9,200
1001 Gain AR 9,200 less AB 6,900
2,300

14
Treas. Reg. 1001-2(c), ex (7)

Assumption of Nonrecourse Note Tufts facts
1,000 cash
19,000 nonrecourse loan

Original purchase price 20,000
Original basis
Original Debt 20,000
19,000
less 3,500 (deductible loss)
no principal payments
AB 16,500
remaining debt 19,000
15
Transfer of asset for assumption of nonrecourse
mortgage
fmv TP (seller)
Buyer
asset fmv 15,000
assumption of 19,000 remaining liability
(nonrecourse)

1001 Gain AR 19,000 less
AB 16,500 2,500


16
Treas. Reg. 1001-2(c), ex (8)
Transfer of asset for assumption of recourse
mortgage
still fmv TP (seller)
Buyer
asset fmv 6,000
assumption of 7,500 liability (recourse)
no information available on taxpayers asset basis
17
Treasury Regulation Approach for
Recourse Mortgages Bi
furcation Part Discharge
Part Sale
AR 7,500 (full debt)
6,000 (fmv of property
transferred) AB 6,000 (fmv property transfe
rred) ? (adjusted
basis in property) 1,500
?
gain

gain or loss
discharge of debt
gain or loss from sale
ordinary income
possibly
capital loss