John F. Tufts and Mary A. Tufts v. Commissioner of Internal Revenue

JERRE S. WILLIAMS, Circuit Judge,

concurring:

I concur with the result reached by our panel because the Commissioner’s position is *1064 inconsistent with the plain language of I.R.C. § 1001(b) and I.R.C. § 752(c). I part company with the majority opinion because it rests on a difference of opinion with the Service over the construction of § 1001 in light of the Crane doctrine. I doubt that we have authority to strike down the Commissioner’s interpretation on the basis of “serious reservations about the Crane decision.” We are authorized, however, to invalidate administrative regulations that conflict with the statute on which they purport to be based.

I understand the majority’s reluctance to extend the Supreme Court’s approach to the taxation of nonrecourse debt cancellation taken in Crane v. Commissioner. Nevertheless, Crane is the law. In this case, we review the Commissioner’s effort to extend the Crane doctrine to plug a breach in the dike holding back a potential flood of tax shelter schemes employing exaggerated depreciation and loss deduction claims grounded on nonrecourse financing-inflated basis. The majority opinion discusses this “potential for abuse” inherent in our ruling, n.9 supra, yet concludes that the Commissioner’s proposed solution, reflected in Treas. Reg. § 1.1001-2 (b) (1980), constitutes an unacceptable “distortpon of] the definition of amount realized.”

With admiration for the logical rigor exhibited in the majority’s analysis of this *1065 problem, I think it is essential to take heed of the constraints our Court operates under when we review an aspect of the intricate enforcement mechanism devised by the Internal Revenue Service to administer the tax laws. If we ignore the adoption of Treas.Reg. § 1.1001-2(b) during the pendency of this appeal 1 and the position asserted by the Internal Revenue Service as merely an administrative interpretation, our Court is obliged to give great weight to the Commissioner’s position. Compare United States v. Fisher, 353 F.2d 396 (5th Cir. 1965) (appellate court is obliged to give “great weight” to Treasury Department’s administrative construction of the National Firearms Act). If, on the other hand, we recognize that the Commissioner’s interpretation before us on this appeal has now been elevated to the status of a regulation, we may invalidate it “only if it is unreasonable and inconsistent with the statute.” Delta Metalforming Co., Inc. v. Commissioner of Internal Revenue, 632 F.2d 442, 449 (5th Cir. 1980) (per Judge Brown). In matters of tax code construction and administration, we must bear in mind that “[t]he choice among reasonable interpretations is for the Commissioner, not the Courts. National Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472, 488 , 99 S.Ct. 1304, 1312 , 59 L.Ed.2d 519 (1979). Whether we regard the view advanced by the Commissioner on this appeal as a mere interpretation or a regulation makes no difference. In this case, the plain language of the statute conflicts with the Service’s position.

Reliance on the literal language of the tax code is a precarious position, especially when dealing with Oaue-like situations. 2 Nevertheless, it seems apparent to me that the question left dangling by footnote 37 of Crane is squarely answered by I.R.C. § 1001(b), which defines “amount realized” as “the sum of any money received plus the fair market value of - the property (other than money) received” (emphasis added). Although the Supreme Court expressly avoided characterizing the taxable economic benefit a transferor of property receives when his transferee takes subject to a non-recourse mortgage as either money or property, 331 U.S. at 14, 67 S.Ct. at 1054, Judge Learned Hand in the same case in lower court declared “it is the law. . .that.. .the release [of nonrecourse indebtedness] would have been ‘property (other than money) received’ within the meaning of § 111(b) [now I.R.C. § 1101(b)].” Commissioner v. Crane, 153 F.2d 504, 505 (2d Cir. 1945). Combining the freeing-of-assets theory underlying the cancellation of indebtedness cases, see United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4 , 76 L.Ed. 131 (1931), with the Crane principle that recourse and nonrecourse indebtedness be treated alike under § 1001, the fair market value of the release corresponds directly to the fair market value of the property securing the nonrecourse indebtedness. 3 Therefore, § 1001(b) imposes tax liability for receipt of a release of nonrecourse indebtedness, but only to the extent of the fair market value of the property transferred subject to the nonrecourse mortgage.

The result compelled by the fair market value limitation of § 1001(b) is also compelled in this case involving partnership taxation by I.R.C. § 752(c), which inserts a parallel fair market value limitation on transfers of mortgaged property within and *1066 by a partnership. Again, the Service’s view that § 752(c) operates independently of § 752(d), see n.8, supra, is at war with the plain language of the statute. Subsection (c) applies: “[f]or purposes of this section.” Subsection (d) is part of § 752 — “this section.” Even if one were to adopt the Millar view and ignore the fair market value limitation of § 1001(b), the clear and specific imposition of a fair market value limitation in § 752(c) would control over § 752(d)’s general reference to the computation embracing the § 1001 definition in the partnership taxation context. Our reading of § 1001(b) is further justified because it does not permit the development of a disparity in the taxation of partnerships as opposed to other business entities.

The result § 1001(b) and § 752(c) compel me to reach produces grave consequences for the equitable administration of the tax code. We abandon the certainty and predictability of calculations based on amounts specified in the nonrecourse mortgage instrument in favor of the elusive concept of fair market value. Under our decision, borrowers with personal liability receive less favorable treatment than nonrecourse borrowers on mortgaged property that declines in value. While I.R.C. § 465’s “at risk” limitations on loss deduction from investments in certain speculative ventures may curb the potential for tax shelter abuses employing nonrecourse financing, § 465 does not reach real estate investments of the sort transferred by the Tufts partnership. Our holding means that the Internal Revenue Service — or Congress — will have to retool the code mechanism for policing exaggerated depreciation and loss deduction claims grounded on a basis inflated by non-recourse borrowing. Section 1001 and 752 simply do not authorize the administrative solution the Service seeks to defend here.

Crane is correct and does not warrant a restrictive interpretation. But the Commissioner’s extension of Crane on review here collides directly with controlling statutory language when the fair market value of the property is less than the amount of the adjusted base, i.e. the amount of the non-recourse debt less the deductions taken.

. Treas.Reg. § 1001-2(b) was promulgated on December 11, 1980.

. One commentator on the Crane doctrine offered this admonition on tax code construction: “Everyday meanings are only of secondary importance when construing the words of tax statute and are very seldom given any weight when a more abstruse and technical meaning is available.” Adams, Exploring the Outer Boundaries of the Crane Doctrine; an Imaginary Supreme Court Opinion, 21 Tax L.Rev. 159, 164 (1966).

. This reckoning echoes the Supreme Court’s language, to which Footnote 37 was appended, in Crane : “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.” 331 U.S. at 14, 67 S.Ct. at 1054 (footnote omitted) (emphasis added).