Income Tax Keyed to Lind
Commissioner v. Tufts
Respondent, Clark Pelt, was a builder and owned Clark, Inc. He and Clark, Inc. formed a general partnership in 1970 in order to construct 120 unit apartment complex. The partnership entered into a mortgage loan agreement with the Farm & Home Savings Association for $1,851,500. It was a non-recourse loan so that neither the partnership nor any of its partners had any personal liability for the loan. Other general partnerships later joined and are also respondents in this case. In 1971 each partner made small capital contributions to the partnership. In 1972 only Respondent made a contribution. The partnerships rental income was less than expected and they were unable to make the mortgage payments. Each partner sold his partnership interest to an unrelated third party. As consideration, the third party assumed the non-recourse mortgage. The Commissioner of Internal Revenue determined that the sale of the partnership resulted in a capital gain of approximately $400,000 arguing that the partnership benefited from the third party assuming the non-recourse mortgage. The Tax Court upheld the Commissioner but the Court of Appeals reversed.
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