Commissioner v. Tufts

A partnership (plaintiffs) built an apartment complex financed with a $1,851,500 nonrecourse mortgage, took large depreciation deductions that lowered its adjusted basis in the property to about $1,455,740, and then sold the property (with the buyer assuming the mortgage) when its fair market value had fallen to about $1,400,000 — below both the mortgage balance and the partnership's adjusted basis. The partners reported a loss based on the property's fair market value, but the Commissioner (defendant) determined the amount realized should include the entire unpaid mortgage balance, producing a substantial capital gain instead; the Tax Court agreed with the Commissioner, and the court of appeals reversed.