CITE AS: Estate of Levine v. Commissioner, 72 T.C. 780
ESTATE OF AARON LEVINE, DECEASED, HARVEY LEVINE, EXECUTOR, ET AL.,
AND ANNA LEVINE, SURVIVING WIFE, PETITIONERS v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 782-76. Filed August 6, 1979.
Decedent exchanged like kind property on July 1, 1968, which he held as
a tenant in common with his son. Said exchange resulted in the receipt of
boot which decedent failed to include in taxable income. Held, the amount
received as boot was properly includable in decedent's taxable income
since the exchange of properties occurred during the taxable year of
decedent's partnership which ended on Dec. 31, 1968, within decedent's
taxable year ended on July 31, 1969. Held, further, decedent realized gain
upon the transfer of real estate, encumbered beyond its adjusted basis, to
a trust for the benefit of his grandchildren, pursuant to sec. 1001(a),
I.R.C. 1954. Crane v. Commissioner, 331 U.S. 1 (1947), followed.
Martin Rosen and Barry L. Gardiner, for the petitioners.
Rudolph J. Korbel and Joan Ronder Domike, for the respondent.
FORRESTER, Judge: For their taxable years ended July 31, 1969 and 1970,
respondent has determined deficiencies in petitioners' Federal income
taxes in the respective amounts of $19,718.49 and $175,244.03. He has also
determined a section 6651(a) <> addition to tax in the amount
of $2,353.11 for the year 1969. Concessions having been made, the
following issues remain for our decision:
(1) Whether decedent realized capital gain during the taxable year
ended July 31, 1969, upon the receipt of boot in an otherwise valid
section 1031 exchange which occurred in taxable year 1968; and
(2) Whether decedent realized capital gain upon the transfer of certain
real property, with outstanding encumbrances that exceeded its adjusted
basis, to a trust which assumed the obligations.
FINDINGS OF FACT
All of the facts have been fully stipulated and are so found. Those
necessary to an understanding of the case follow.
Aaron Levine (hereinafter decedent) and Anna Levine, <> as
husband and wife, filed joint Federal income tax returns for the years in
issue with the District Director in Andover, Mass. The executor of
decedent's estate, Harvey Levine (hereinafter petitioner or Harvey),
resided in Woodmere, N.Y., at the time the petition herein was filed.
Decedent and Harvey managed various commercial real estate properties
in which they held an interest. They owned, as tenants in common, a
commercial building located at 187 Broadway, New York, N.Y. As the lessors
and property managers, they provided the tenants with necessary services.
The property's books and records were maintained on a calendar year basis
at decedent's office in New York. No partnership returns were ever filed
with respect to this property; nevertheless, the income or loss from the
property was reported, pro rata, on the fiscal yearend return of decedent
and the calendar yearend return of petitioner.
Decedent and Harvey also owned, as tenants in common, a building at 183
Broadway, New York, N.Y. As with the 187 Broadway property, they performed
various management services in conjunction with their ownership of the 183
Broadway property. On July 1, 1968, decedent and Harvey exchanged the
property at 187 Broadway for the like kind property at 183 Broadway. As a
result of this transaction, decedent received additional consideration of
$60,000 which he failed to include as gain realized from the 1968
exchange, either on his return for the year ended July 31, 1968, or his
return for the year ended July 31, 1969.
In addition to the above properties, decedent owned income-producing
property at 20-24 Vesey Street, New York, N.Y. This property was
originally purchased on November 1, 1944, by decedent's wholly owned
corporation. On August 22, 1957, the corporation, in conjunction with its
dissolution, made a liquidating distribution of the property to decedent.
On March 17, 1966, decedent obtained from the Bowery Savings Bank a
mortgage consolidation of $500,000, representing the consolidation of
numerous earlier mortgages made with respect to the subject property. The
mortgage history giving rise to such consolidation is as follows:
SCHEDULE OF MORTGAGE HISTORY: 20-24 VESEY STREET
(1) On October 27, 1944, a purchase money mortgage was executed for
$148,000.00 in favor of Mutual Life Insurance Company of New York.
(2) On August 9, 1950, a mortgage loan for $120,108.97 was received
from the Seamen's Bank for Savings and was consolidated with the
$129,891.03 balance of the above purchase money mortgage into a new
$250,000.00 mortgage.
(3) On July 30, 1953 a mortgage loan for $100,000.00 was received from
James John Trading Corp.
(4) On August 10, 1955 a mortgage loan for an additional $100,000.00
was received from James John Trading Corp.
(5) On June 17, 1958, a mortgage loan for $214,955.77 was received from
Bowery Savings Bank and was consolidated (with the $235,044.23 combined
balance of the consolidated mortgage referred to in paragraph (2) hereof
and the two mortgages described in paragraphs (3) and (4) of this
Schedule) into a new mortgage loan of $450,000.00.
(6) On May 17, 1963 a mortgage loan for $120,000.00 was received from
The Morris Morgenstern Foundation.
(7) On March 17, 1966, a mortgage loan of $37,001.77 was received from
Bowery Savings Bank and was consolidated (with the $462,998.23 balance of
the consolidated mortgage referred to in paragraph (5) of this Schedule
and the mortgage referred to in paragraph (6) of this Schedule) into a new
mortgage loan of $500,000.00, which became a standing mortgage.
Decedent obtained, on November 21, 1968, an additional mortgage on the
Vesey Street property from the Commercial Trading Co. in the amount of
$300,000. All of the nonrecourse mortgages were secured by the underlying
Vesey Street property which had an appraised value, as of January 1, 1970,
of $925,000.
On or about January 1, 1970, decedent transferred, inter alia, the
Vesey Street property to a trust dated December 1, 1969, created by
decedent, as a sole grantor, for the benefit of his three grandchildren.
At the time of this transfer, there existed outstanding mortgages and
liabilities on such property, all of which were assumed by the trust.
Pursuant to this transfer, decedent timely filed Form 709, U.S. Gift
Tax Return, and reported the transfer as follows:
20-24 Vesey Street, city,
county and State of New
York--appraisal value $925,000.00
Mortgages:
Bowery Savings Bank $500,000.00
Interest accrued
12/1/69 to 12/31/69 2,291.67
Commercial Trading <1> 280,000.00
Interest accrued
12/1/69 to 12/31/69 3,616.67
-----------
$785,908.34
Expenses incurred by
donor in 1969 and
assumed and paid by
donee:
Improvements $117,716.53
Supplies 387.83
Repairs 1,253.93
Paint 63.60
Electricity 1,827.56
Steam 3,324.13
-----------
Total expenses 124,573.58
-----------
Total mortgages,
interest, and
expenses 910,481.92
-----------
Equity 14,518.08
----------
1/ Between November 1968 and January 1970, $20,000 of the $300,000
principal was amortized.
The mortgage loan funding on the property from 1944 to the time of
transfer totaled $1,140,066.51. Of this amount, $671,957.54 was in
mortgages placed on the property by decedent after his receipt of the
property in 1957. Payments on these mortgages amounted to $360,066.51, of
which $127,001.77 was paid by decedent from 1957 until the 1970 transfer.
In addition, during the period from August 22, 1957, through January 1,
1970, decedent invested $334,452 in the form of permanent improvements to
the property. His adjusted basis for the property, as of January 1, 1970,
was $485,429.55. At the time of the transfer to the trust, the excess of
liabilities (inclusive of mortgages and other liabilities) over decedent's
adjusted basis for the Vesey Street property was $425,051.79.
In the statutory notice of deficiency, respondent determined that
petitioner recognized gain to the extent of boot, under section 1031(b),
on the July 1, 1968, exchange since the operation of the property in
question was deemed a partnership under section 761. Respondent further
determined that petitioner realized gain on the January 1, 1970, transfer
of the Vesey Street property to a trust because the outstanding mortgage
loans and other expenses were assumed by the trust and are properly
treated as amounts received pursuant to section 1001(a).
OPINION
The parties are in agreement that decedent received $60,000 of capital
gain as a result of the section 1031 exchange on July 1, 1968. However,
the parties disagree on whether decedent should have reported it for
Federal income tax purposes on his return for the taxable year ended July
31, 1969. This issue further raises the subsidiary question of whether a
partnership existed between the parties and, if so, whether it was
terminated by the exchange.
Assuming, arguendo, that a partnership existed, petitioner contends
that such partnership with respect to the 187 Broadway property terminated
for tax purposes on July 1, 1968, the date that said property was
exchanged for like kind property located at 183 Broadway. Respondent, on
the other hand, argues that no terminating event, within the meaning of
section 708(b)(1), had occurred; consequently, the partnership continued
in existence and its taxable year did not end on July 1, 1968.
Section 761(a) defines a partnership to include "a syndicate, group,
pool, joint venture or other unincorporated organization through or by
means of which any business, financial operation, or venture is carried
on." See also sec. 7701(a)(2). Section 1.761-1(a), Income Tax Regs.,
furnishes additional guidance on the question of whether a partnership is
created, in fact, absent some form of agreement:
(a) Partnership. * * * The term "partnership" is broader in scope than
the common law meaning of partnership, and may include groups not commonly
called partnerships. * * * A joint undertaking merely to share expenses is
not a partnership. For example, if two or more persons jointly construct a
ditch merely to drain surface water from their properties, they are not
partners. Mere coownership of property which is maintained, kept in
repair, and rented or leased does not constitute a partnership. For
example, if an individual owner, or tenants in common, of farm property
lease it to a farmer for a cash rental or a share of the crops, they do
not necessarily create a partnership thereby. TENANTS IN COMMON, HOWEVER,
MAY BE PARTNERS IF THEY ACTIVELY CARRY ON A TRADE, BUSINESS, FINANCIAL
OPERATION, OR VENTURE AND DIVIDE THE PROFITS THEREOF. FOR EXAMPLE, A
PARTNERSHIP EXISTS IF COOWNERS OF AN APARTMENT BUILDING LEASE SPACE AND IN
ADDITION PROVIDE SERVICES TO THE OCCUPANTS EITHER DIRECTLY OR THROUGH AN
AGENT. * * * [Emphasis supplied.]
See also sec. 301.7701-3, Proced. & Admin. Regs.; McShain v. Commissioner,
68 T.C. 154, 160 (1977).
Furthermore, it is well settled that whether a partnership exists is a
question of fact. Commissioner v. Tower, 327 U.S. 280 (1946). The crucial
test emerging from partnership cases is whether decedent and Harvey
intended to create, as evidenced by their actions, a partnership,
notwithstanding the lack of characterization of their relationship.
Commissioner v. Culbertson, 337 U.S. 733 (1949). See also Gilford v.
Commissioner, 201 F.2d 735, 736 (2d Cir. 1953), affg. a Memorandum Opinion
of this Court.
While not conceding the issue, petitioner has cited no cases in support
of his contention that a partnership did not exist between decedent and
Harvey. Apparently, petitioner seeks to buttress his contention by relying
upon the parties' lack of characterization of their relationship.
It is clear from the facts that both subject properties were held by
decedent and Harvey as tenants in common. Moreover, all profits and losses
on such properties were shared equally. Decedent and Harvey engaged in the
active conduct of a trade or business. This is evidenced by the fact that
they furnished property management services to the tenants of their many
real estate properties, including the two properties at issue.
Tenants in common who rent their property are not ipso facto partners
for tax purposes. Hahn v. Commissioner, 22 T.C. 212, 214 (1954).
Nevertheless, the evidence in the record overwhelmingly supports a finding
that decedent and Harvey intended to, and did, operate as a partnership.
They engaged in an active business, performed various services, and shared
the gains and losses. Such factors are more indicative of an intent to
manage the properties as a partnership than as a mere passive investment.
<> We find that decedent and Harvey were engaged in the
operation of a partnership with respect to the 183 Broadway Street
property and the 187 Broadway Street property.
Petitioner further contends that, assuming a partnership is found to
exist, such partnership terminated for tax purposes on July 1, 1968, the
date that such property was exchanged for like kind property at 183
Broadway. In opposition, respondent maintains that the exchange on said
date of the 187 Broadway property for like kind property at 183 Broadway
was effected in furtherance of the continuing partnership of decedent and
his son.
<>
Section 708(a) states the general rule that an existing partnership
shall be considered as continuing if it is not terminated. Subsection (b)
of section 708 indicates when a partnership is considered terminated for
subsection (a) purposes. It provides:
(b) TERMINATION.--
(1) GENERAL RULE. For purposes of subsection (a), a partnership shall
be considered as terminated only if--
(A) no part of any business, financial operation, or venture of the
partnership continues to be carried on by any of its partners in a
partnership, or
(B) within a 12-month period there is a sale or exchange of 50 percent
or more of the total interest in partnership capital and profits.
Petitioner's argument focuses on section 708(b)(1)(A). He posits that
all business operations of the 187 Broadway partnership were discontinued
on July 1, 1968, since the partnership's sole asset was used in the
exchange. Therefore, the partnership was effectively terminated within the
meaning of section 708(b)(1)(A). It would necessarily follow from this
conclusion that the partnership year closed upon its termination on July
1, 1968, pursuant to section 706(c), and that any gain realized on the
exchange must fall within decedent's July 31, 1968, taxable year as
provided by section 706(a). Decedent failed to report such gain on his
fiscal year ended July 31, 1968, return and since the period of
limitations on assessment and collection under section 6501(a) bars an
assessment at this time, it is petitioner's position that decedent's gain
realized on the July 1, 1968, exchange is without tax consequence.
We do not agree. The decedent and Harvey performed the same services in
their real estate business after the exchange as before. Moreover, after
the exchange, the partnership continued to hold income-producing realty.
Such property was held by the partnership and was not held by decedent and
Harvey. The primary purpose of the partnership did not cease to exist. Cf.
Baker Commodities, Inc. v. Commissioner, 48 T.C. 374 (1967), affd. 415
F.2d 519 (9th Cir. 1969). The record is silent as to whether decedent or
Harvey intended to terminate their partnership and wind up its affairs. We
can only assume that they intended to continue the operation of their real
estate business as evidenced by facts such as the rendering of necessary
services to the new property's tenants and the sharing of the profits and
losses from the new property.
The principal argument raised in petitioner's brief circumnavigates
these facts by focusing on the exchange of the partnership's only asset
which, according to petitioner, results in the cessation of business
operations of the partnership. However, this argument cannot prevail.
Continuation of a partnership for tax purposes does not mean that the
underlying partnership properties may never be sold or exchanged. To the
contrary, we have held that the transfer by a partnership of all of its
assets and its business activity to a corporation does not ipso facto
terminate the existence of the partnership for Federal income tax
purposes. Foxman v. Commissioner, 41 T.C. 535, 556-557 (1964), affd. 352
F.2d 466 (3d Cir. 1965).
Other courts have faced the question of partnership termination, in
similar contexts, and found that the receipt of investment properties or
promissory notes by the partnership, upon disposition of its properties,
was sufficient for continuation of the partnership. Baker Commodities,
Inc. v. Commissioner, 415 F.2d 519, 526 (9th Cir. 1969); Ginsburg v.
United States, 184 Ct. Cl. 444, 396 F.2d 983 (1968). These cases are
sufficiently similar to the instant case to be persuasive that there was
no termination by reason of section 708(b)(1)(A).
Section 708(b)(1)(B) is equally inapposite to the instant case. Neither
decedent nor Harvey had transferred any of their respective partnership
interests within a 12-month period. Nor did the exchange of the properties
constitute an exchange of 50 percent or more of the total interest in
partnership capital and profits. See sec. 1.708-1(b)(1)(ii), Income Tax
Regs. The transaction hereunder was merely a tax-free exchange of an
existing partnership property for another. At no time was there a sale by
either decedent or his son of any interest in partnership profits, hence
there was no termination under section 708(b)(1)(B). See Barran v.
Commissioner, 39 T.C. 515, 528 (1962), revd. on another issue 334 F.2d 58
(5th Cir. 1964).
It is clear that for Federal tax purposes, the partnership had not been
terminated at the time of the exchange within the provisions of section
708(b)(1)(A) or section 708(b)(1)(B). As a result, the gross income of
decedent includes his distributive share of the partnership's gains from
the exchange of a partnership capital asset pursuant to section 702(c).
The exchange of properties, accompanied by boot, occurred on July 1, 1968,
which was during the taxable year of the partnership ended December 31,
1968. We find, therefore, that the taxable year of the partnership ending
on that date is within decedent's taxable year ending July 31, 1969, and
that he is required to include the $60,000 boot in his taxable income for
said taxable year and we so hold.
The next issue is whether decedent realized gain upon the transfer of
real estate, encumbered beyond its adjusted basis by mortgages and other
outstanding liabilities, to a trust for the benefit of his grandchildren
on about January 1, 1970. Petitioner's basic argument is that decedent
need not recognize taxable income upon the transfer since the donee takes
a substituted basis from the donor under section 1015. Thus, under
petitioner's reasoning, the donee would immediately be faced with reduced
depreciation deductions and eventually a larger capital gains tax upon the
ultimate disposition of the property. Respondent, on the other hand, would
have decedent recognize gain upon the transfer of the property, measured
by the excess of the mortgages and assumed liabilities over adjusted
basis.
It is petitioner's theory that decedent realized nothing upon the
transfer of the property (20-24 Vesey Street) and so there was nothing to
tax as a gain under section 1001(a) and (b). Said subsections provide, in
pertinent part:
(a) COMPUTATION OF GAIN OR LOSS.--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 for determining
gain, and the loss shall be the excess of the adjusted basis provided in
such section for determining loss over the amount realized.
(b) AMOUNT REALIZED.--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 (other than money) received. * * *
That there was a disposition of the property by decedent seems clear.
He made a complete and irrevocable transfer of the property to a trust for
the benefit of his grandchildren. The question, however, is not whether a
disposition occurred within the meaning of section 1001(b), but whether a
gain was realized from such disposition. Therefore, the threshold question
is whether decedent received from his disposition of the property, money
or other property of a value in excess of his adjusted basis.
When decedent received the property upon the liquidation of his wholly
owned corporation in 1951, his basis was its fair market value as
determined under section 334(a). Since his receipt of the property and
until the date of its disposition in 1970, he obtained $671,957.54 as a
result of additional nonrecourse mortgage loans, repaid $127,001.77 of
outstanding mortgage loans, and invested $334,452 of mortgage proceeds in
the form of improvements to the property. We must conclude, therefore,
that decedent retained $210,503.77 of mortgage proceeds for his personal
use. <>
On the date of the transfer to the trust, the mortgage liabilities
totaled $780,000. In addition, there was $5,908.34 of accrued interest on
such liabilities and $124,573.58 of expenses incurred by decedent--both of
which were assumed and paid by donee. Of this last amount, $117,716.53 had
been spent for permanent improvements to the property. The parties are in
agreement that decedent's adjusted basis for the property on the transfer
date to the trust was $485,429.55, and that the excess of the outstanding
mortgages, interest, and other liabilities over the adjusted basis of the
property was $425,051.79.
We believe that the posed question--whether this last named figure is
gain to decedent--is governed by Crane v. Commissioner, 331 U.S. 1 (1947).
Therein, a taxpayer inherited income-producing realty subject to a
nonrecourse mortgage in an amount equal to the value of the property. Upon
sale of the property, subject to the mortgage, taxpayer received net cash
proceeds of $2,500 which she maintained was the amount realized on the
sale. This sum, less her zero (equity) basis in the property, was the
amount she reported as gain. The Supreme Court disagreed, however, stating
that her basis in the inherited property was its value and further
determined that the amount realized on the sale was equivalent to the cash
received plus the nonrecourse mortgage taken subject to by the purchaser.
Upon reflection, it becomes clear that under both section 1001(a) and
Crane v. Commissioner, <> supra, decedent received a tangible
economic benefit as measured by the excess of the mortgages, interest, and
other assumed liabilities over the adjusted basis of the property. The
Supreme Court indicated the nature of this economic benefit when it stated
in Crane (331 U.S. at 14):
we think that a mortgagor, not personally liable on the debt, who sells
the property subject to the mortgage and for additional consideration,
REALIZES A BENEFIT IN THE AMOUNT OF THE MORTGAGE AS WELL AS THE BOOT. If a
purchaser pays boot, it is immaterial as to our problem whether the
mortgagor is also to receive money from the purchaser to discharge the
mortgage prior to sale, or whether he is merely to transfer subject to the
mortgage--it may make a difference to the purchaser and to the mortgagee,
but not to the mortgagor. Or put in another way, we are no more concerned
with whether the mortgagor is, strictly speaking, a debtor on the
mortgage, than we are with whether the benefit to him is, strictly
speaking, a receipt of money or property. We are rather concerned with the
reality that an owner of property, mortgaged at a figure less than that at
which the property will sell, must and will treat the conditions of the
mortgage exactly as if they were his personal obligations. IF HE TRANSFERS
SUBJECT TO THE MORTGAGE, THE BENEFIT TO HIM IS AS REAL AND SUBSTANTIAL AS
IF THE MORTGAGE WERE DISCHARGED, OR AS IF A PERSONAL DEBT IN AN EQUAL
AMOUNT HAD BEEN ASSUMED BY ANOTHER. [Fn. ref. omitted; emphasis supplied.]
Notwithstanding the tangible economic benefit which decedent received
from this transaction, it is petitioner's contention that the transaction
hereunder was a mere gift and, as such, no Federal income tax consequences
result. <> This contention begs the question. The conclusion
naturally follows that a bona fide gift triggers no income tax
consequences to the donor. However, such is not the case here.
In the instant case, we believe that decedent has taxable income upon
the disposition of the encumbered property. The transaction may be viewed
as a combination gift and sale. The transaction's gift appearance is
determined by the net gift portion of the transfer, amounting to the
$14,518.08 equity in the property at the time of transfer, and its sale
aspect is measured by the taxable portion heretofore described. A part
gift, part sale transaction will result in tax consequences to the donor
and we have so held. <> Johnson v. Commissioner, 59 T.C. 791,
807 (1973), affd. 495 F.2d 1079 (6th Cir. 1974). Since the assumption of
the nonrecourse mortgage notes requires their inclusion in the amount
realized under Crane v. Commissioner, supra, the result in the case sub
judice is a partial sale. See also sec. 1.1001-1(e)(1), Income Tax Regs.
Petitioner argues further that the transaction at hand was a bona fide
gift since the mortgage liabilities on the property were incurred many
years beforehand. In support of this argument, he points to the mortgage
history schedule which indicates that within the approximate 3 3/4-year
period preceding the gift, only $37,001.77 of the mortgage funds had been
borrowed.
This argument misses its mark. While the timing of the loans may be
evidence of a lack of an overall plan to bail out mortgage proceeds from
the very start, as under Johnson v. Commissioner, supra, nevertheless,
decedent has reaped a tangible economic benefit from this transaction and
such economic benefit is subject to tax under the rationale of Crane v.
Commissioner, supra.
Decedent's purported nontaxable transfer also fails to withstand
scrutiny under the constructive receipt of income theory. Section 61(a)
provides, in relevant part, that gross income means all income from
whatever source derived, including (but not limited to) 15 separate items.
Income from discharge of indebtedness, under section 61(a)(12), is one
item includable in gross income. Thus, the assumption of a debt by a
donee, that benefits the donor, is generally regarded as the constructive
receipt of income. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729
(1929).
A nonrecourse mortgage debt is a debt of the property owner since he
is, in reality, a quasi-obligor on the debt, notwithstanding the fact that
the debt is owed by the property. Cf. Woodsam Associates, Inc. v.
Commissioner, 16 T.C. 649, 654 (1951), affd. 198 F.2d 357 (2d Cir. 1952).
This means that gain is realized where a mortgage debt is assumed by the
donee since such assumption is the equivalent of the constructive receipt
of cash by the donor. Crane v. Commissioner, 331 U.S. at 13-14.
Finally, by the trustee taking the 20-24 Vesey Street property subject
to the mortgages, he also assumed the unpaid or accrued interest
liabilities. Clodfelter v. Commissioner, 48 T.C. 694, 701-703 (1967),
affd. 426 F.2d 1391 (9th Cir. 1970). The outstanding liabilities <> which were assumed and paid by the trustee are similarly treated as
includable in decedent's amount realized on the transfer since decedent
was relieved of a personal liability. Crane v. Commissioner, supra.
Therefore, after a careful review of the entire record and for all of
the above reasons, we hold that decedent realized gain to the extent of
$425,051.79 upon the transfer of the 20-24 Vesey Street property,
encumbered beyond its adjusted basis and with outstanding liabilities, to
a trust for the benefit of his grandchildren.
Because of concessions,
Decision will be entered
under Rule 155.
<>
1/ Unless otherwise specified, all statutory references are to the
Internal Revenue Code of 1954.
2/ Petitioner Anna Levine is a party herein only because of the joint
returns she filed with decedent.
3/ Cf. Huckle v. Commissioner, T.C. Memo. 1968-45.
4/ Petitioner argues that he did not stipulate that any mortgage
proceeds were ever "retained as cash" by decedent; however, he has offered
no proof that this balance of the mortgage proceeds ($210,503.77) was
devoted, at any time, to the improvement of the subject property.
5/ On brief, petitioner asserts that Crane v. Commissioner, 331 U.S. 1
(1947), is limited to sale transactions and is, therefore, inapposite to
the case at hand. Petitioner offers no support for this assertion. To the
contrary, ample authorities exist that have applied the doctrine of the
Crane case in numerous situations. See Commissioner v. Fortee Properties,
211 F.2d 915 (2d Cir. 1954) (condemnation); Bolger v. Commissioner, 59
T.C. 760 (1973) (net lease); Mayerson v. Commissioner, 47 T.C. 340 (1966)
(unassumed mortgage purchase).
Furthermore, a close reading of the Crane case discloses that the basis
for the Supreme Court's decision was not the form of the transaction but,
rather, was the benefit which the transferor derived from the transaction.
See Crane v. Commissioner 331 U.S. at 14. This economic benefit is present
whether the transaction is labeled a sale or a combination gift and sale.
Cf. Malone v. United States, 326 F. Supp. 106 (N.D. Miss. 1971), affd. per
curiam 455 F.2d 502 (5th Cir. 1972).
6/ Under petitioner's rationale, for instance, a taxpayer could place a
$95,000 mortgage on a property valued at $100,000 and with a basis to him
of $5,000. He would then pocket the $95,000 in cash and donate the
property, tax free, to a donee who would take the property subject to the
mortgage. On the other hand, if that game taxpayer had sold the property,
he would have realized $95,000 in gain.
This result is even more ludicrous if the donee sells the encumbered
property upon receipt. In the example, the donee would realize a gain of
$95,000, the excess of $100,000 realized over a substituted basis of
$5,000. This amount realized would be further reduced by the applicable
capital gains tax on $95,000. In essence, the $95,000 gain and the
accompanying tax could exceed the value of the property. Therefore, under
petitioner's gift theory, a donor of encumbered property would be at a
significant economic advantage, whereas the donee of such property would
be at a material economic disadvantage, a result which we cannot believe
Congress intended.
7/ The record is silent on the question of whether the donor used any
portion of the loan proceeds to pay the gift tax on the transfer as in
Johnson v. Commissioner, 59 T.C. 791 (1973), affd. 495 F.2d 1079 (6th Cir.
1974). Nevertheless, Johnson has been interpreted to stand for the
combination gift and sale transaction. See Hirst v. Commissioner, 63 T.C.
307 (1974), affd. 572 F.2d 427 (4th Cir. 1978). Compare Turner v.
Commissioner, 49 T.C. 356 (1968), affd. per curiam 410 F.2d 752 (6th Cir.
1969) (net gift), with Johnson v. Commissioner, supra (part gift, part
sale).
8/ Of the $124,573.58 of expenses incurred by decedent in 1969 and
accrued and paid by the trust, $117,716.53 represents permanent
improvements to the 20-24 Vesey Street property and, as such, has been
added to that property's adjusted basis. Therefore, the inclusion of this
sum in the amount realized is a "wash," resulting in a net increase in the
amount realized of $6,857.05.