Ebben v. Commissioner , 783 F.2d 906 ( 1986 )

CYNTHIA HOLCOMB HALL, Circuit Judge:

Taxpayers Leo G. Ebben, Donna W. Ebben, Gilbert Dreyfuss, Evelyn H. Dreyfuss, Donald Kaufman, Gloria Kaufman, Eli Broad, and Edythe L. Broad petition for review of a tax court decision redetermining deficiencies in their federal income taxes. The Internal Revenue Service (IRS) asserted the deficiencies after taxpayers, a partnership, claimed charitable deductions from the donation of property to Pitzer College. We affirm in part and reverse in part the tax court’s redetermination of taxpayers’ liability.

I

In December 1968 taxpayers Kaufman and Broad purchased an unimproved parcel of real estate for $548,000. They paid $3,416 in cash and gave a nonrecourse note for $544,584, secured by a deed of trust. In addition, Kaufman and Broad prepaid $999,211.20 of interest on the note.

On January 1, 1969 taxpayers and others formed Whitney Farms, a general partnership created to hold real estate investments. A few days later, Kaufman and Broad transferred their interests in the subject property to Whitney Farms as a contribution of capital. The partnership took the property subject to the note and trust deed. Whitney Farms continued to hold the property until December 28, 1973 when the entire parcel was donated to Pitzer College, a qualified charitable organization under the Internal Revenue Code of 1954, 26 U.S.C. § 170 (cited hereafter as “I.R.C.”). Pitzer accepted the gift subject to the note and deed of trust, which secured an outstanding obligation in the amount of $544,584 on the date of transfer.

The donated property consisted of 931.66 acres located in Placer County. Fiddyment Road divides the parcel into two areas: 322.63 acres west of the road (west tract) and 609.03 acres east of the road (east tract). As of December 28, 1973, both tracts were zoned “U,” except for an irregular 75-acre “arm” of the east tract which was zoned “M” or “M-D.” A “U” zone permits agricultural or residential uses, while an “M” or “M-D” zone allows for more valuable industrial uses.

Taxpayers hired three expert appraisers to value the land at the date of transfer to Pitzer for purposes of calculating their charitable deductions. From interviews with county officials and a planning report commissioned by the county, these appraisers concluded that the entire east tract had industrial potential and valued the land accordingly. Taxpayers used these appraisals to calculate their charitable deductions as follows:

Appraised value at date of gift $1,420,000

Less: Deed of trust $ 544,584

Total deduction $ 875,416

The taxpayers claimed a deduction on their individual tax returns proportionate to their partnership interest in Whitney Farms.

The IRS disagreed with taxpayers’ valuation, and asserted deficiencies in the various years in which the deductions were claimed. Specifically, the IRS asserted: (1) that the east tract had been overvalued by almost $1 million, and (2) that taxpayers’ relief from the nonrecourse loan should be treated as a bargain sale to a charity resulting in taxable gain under I.R.C. § 1011(b). Taxpayers then filed a petition in the tax court to redetermine the deficiencies; the tax court upheld the IRS’s assessment.

II

We review the tax court’s determination of property value under the clearly erroneous standard. Hokanson v. Commissioner, 730 F.2d 1245, 1249 (9th Cir.1984); United States v. McConney, 728 F.2d 1195, 1200 n. 5 (9th Cir.1984) (en banc), cert. denied, — U.S. -, 105 S.Ct. 101, 83 L.Ed.2d 46 (1985). Complex factual inquiries such as valuation require the trial judge to evaluate a number of facts: whether an expert appraiser’s experience and testimony entitle his opinion to more or less weight; whether an alleged comparable sale fairly approximates the subject property’s market value; and the overall cogency of each expert’s analysis. Trial courts have particularly broad discretion with respect to questions of valuation.¹ The tax court’s decision to analyze the gift of encumbered property as a bargain sale is reviewed de novo. McConney, 728 F.2d at 1201.

Ill

The IRS asserts that taxpayers overvalued the east tract in two ways. First, the portion of the east tract zoned “U” should be valued as farm land rather than a potential industrial site because agriculture was the highest and best use for the land on the transfer date. Second, taxpayers failed to prove that the portion of the east tract zoned “M” or “M-D” was worth more than the government’s appraisal of $1,000 per acre. The tax court ruled for the IRS on both of these issues. We affirm the tax court’s valuation of the portion of the east tract zoned “U” and reverse the tax court’s decision with respect to the portion zoned “M” or “M-D”.

A

Treasury Regulation § 1.170A-l(c)(2) defines the fair market value of property as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of . the relevant facts.” ² Both parties cite this regulation approvingly, but they disagree as to the “relevant facts.” The amount a “willing buyer” would pay for the subject property depends, of course, on the uses to which he may put the land. As of the transfer date, all but 75 acres of the east tract was zoned for agricultural or residential use. The tax court found agriculture to be the highest and best use for the land and assigned a value of $600 per acre.³

Taxpayers contend that the tax court’s valuation is clearly erroneous because it conflicts with their evidence that the east tract will be rezoned for industrial uses. The appraisers hired by taxpayers considered the entire east tract to have industrial potential and valued it at $1,500 to $2,000 per acre.⁴ The tax court, however, relied on the alternative analysis put forth by the government’s appraiser. The tax court found that the portion of the east tract zoned “U” had no industrial potential in the foreseeable future because: (1) a surplus of undeveloped industrial land existed in 1973 (only 10% of the designated industrial district had been developed); (2) testimony that county officials would have approved rezoning in 1977 was inadequate to show there would have been support for rezoning in 1973; and (3) the government’s appraiser relied in part on two sales of land adjoining the industrial district, both of which had sold in the $600 range.⁵ On the basis of these facts, we hold that the tax court’s decision to value the east tract as agricultural land is not clearly erroneous. We therefore affirm the tax court’s value of $600 per acre for the portion of the east tract zoned for unclassified uses.

B

The parties also disagree as to the value of the 75 acres in the east tract zoned for industrial use. In five of the six consolidated cases the tax court ruled that this portion of the east tract was worth $1000 per acre. In the Ebben case, however, the tax court assigned a value of $1600 per acre to the same land. The tax court clearly erred in assigning a lower value to the same land in five of the six cases. We reverse the tax court in those five cases and hold that the 75 acres in the east tract zoned “M” or “M-D” should be valued at $1600 for each taxpayer.

By tax court rule, the value used by the IRS in its statutory notice of deficiency is presumed correct. T.Ct. Rule 142(a) (codified at 26 U.S.C. foil. § 7453). The notices of deficiency mailed to the taxpayers in this case contained different values for the subject property.⁶ The tax court, however, chose not to rely on the presumed correctness of the notices of deficiency and instead assigned its own value to the 75 acres. Having decided to make an independent valuation, the tax court should have assigned just one value for the subject property.⁷

Our review of the record indicates that the evidence supports a value of $1600 per acre for the land zoned “M” or “M-D” in all of the six cases before us. We therefore reverse the tax court’s decision to value the industrial portion of the east tract at $1000 per acre in five of the six cases.

IV

The second issue before us is how basis is to be computed upon the gift of the subject land to a charitable organization. We hold that a transfer by gift of encumbered property to a charity is a “sale” under section 1011(b).

Section 1001 states that “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____” I.R.C. § 1001(a). Under section 1001, the phrase “other disposition of property” includes a gift of property. Treasury Regulation § 1.1001-2(a)(4)(iii) provides: “A disposition of property includes a gift of the property or a transfer of the property in satisfaction of liabilities to which it is subject.”

Taxpayers concede that the amount of the encumbrance on the property contributed to charity is an “amount realized.” See Estate of Levine v. Commissioner, 72 T.C. 780, 789-91 (1979) aff'd, 634 F.2d 12, 15 (2d Cir.1980). Taxpayers also concede that the contribution to charity is a disposition of property which causes the amount of the encumbrance to be an “amount realized” by the taxpayers on such disposition. Thus, taxpayers realized $544,584 from the transfer of the property to Pitzer because the college took the land subject to a note and deed of trust in that amount. But taxpayers contend that “not every disposition of encumbered property to a charity is a ‘sale’ to the extent of the encumbrance, but will be considered a ‘sale’ only where the taxpayer directly or indirectly realized a benefit from such encumbrance.” Taxpayers then limit “benefit” to receipt of cash when a loan is placed on the property prior to the contribution or deduction of depreciation with respect to the amount of the encumbrance which had been included in taxpayers’ basis under Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947). We hold that every contribution of mortgaged property to charity is a “sale” and basis is computed under section 1011(b).⁸

Taxpayers assert that in this case their basis is calculated under paragraph (a) of section 1011 which states that adjusted basis is historical cost minus some adjustments which are not relevant in this case. Under section 1011(a), the taxpayers’ adjusted basis is the purchase price of the property, $548,000 ($3,416 cash plus a $544,584 mortgage). There was no adjustment for depreciation because the subject property was unimproved. Taxpayers therefore contend that the donation of the property to Pitzer did not give rise to taxable gain because the amount realized ($544,584) was less than the adjusted basis of the property ($548,000).

The IRS, on the other hand, contends that paragraph (b) of section 1011 controls the basis calculation. Section 1011(b) provides:

If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property. (Emphasis added.)

Under this paragraph, taxpayers realize taxable gain because the amount realized ($544,584) exceeds the allocated basis ($506,679).⁹

As stated above, the issue before us is whether the gift of mortgaged property to a charity is a “sale” under section 1011(b). Taxpayers assert that because section 1011(b) uses the word “sale” rather than the term “sale or other disposition” used elsewhere in the Code, Congress intended to limit the scope of section 1011(b) to cases in which the taxpayer received a benefit such as cash on mortgaging the property or depreciation deduction with respect to the property prior to transferring it to the charity.

The Supreme Court in Commissioner v. Tufts, 461 U.S. 300, 307-310, 103 S.Ct. 1826, 1831-1832, 75 L.Ed.2d 863 (1983), however, established that taxation on relief from debt under Crane does not depend on any theory of economic benefit and applies to situations in which no depreciation deductions have been taken. The Court stated:

This, however, does not erase the fact that the mortgagor received the loan proceeds tax-free and included them in his basis on the understanding that he had an obligation to repay the full amount____ When the obligation is canceled, the mortgagor is relieved of his responsibility to repay the sum he originally received and thus realizes value to that extent within the meaning of § 1001(b). From the mortgagor’s point of view, when his obligation is assumed by a third party who purchases the encumbered property, it is as if the mortgagor first had been paid with cash borrowed by the third party from the mortgagee on a nonrecourse basis, and then had used the cash to satisfy his obligation to the mortgagee.

Tufts, 461 U.S. at 312, 103 S.Ct. at 1834 (citation omitted). When the taxpayers in this case gave the subject property to Pitzer College, which took the property subject to the debt, it was as if the taxpayers had been paid with cash borrowed by Pitzer College from the mortgagee on a nonrecourse basis, and then had used the cash to satisfy their obligation to the mortgagee. “When a taxpayer receives a loan, he incurs an obligation to repay that loan at some future date. Because of this obligation, the loan proceeds do not qualify as income to the taxpayer. When he fulfills the obligation, the repayment of the loan likewise has no effect on this tax liability.” Tufts, 461 U.S. at 307, 103 S.Ct. at 1831. But when someone else relieves him of his obligation to pay the loan, it is as though the taxpayer had received cash and the transfer of the encumbered property to the charity is the equivalent of a sale without regard to any tax benefit theory. See Commissioner v. Peterman, 118 F.2d 973 (9th Cir.1941) (transfer held to be “sale or exchange” within meaning of capital gains provisions even though transferor received no economic benefit); Freeland v. Commissioner, 74 T.C. 970, 977 (1980) (same).

The tax court, in a decision unanimously reviewed by the full court, has specifically held that a gift of encumbered property to a charity is a “sale” as that term is used in section 1011(b). Guest v. Commissioner, 77 T.C. 9 (1981). The taxpayer in Guest donated mortgaged property to a charity. The court held that the gift resulted in taxable gain and the basis used to determine gain was an allocated basis calculated under section 1011(b). Guest, 77 T.C. at 24-26 & n. 12.

The tax court concluded that there was a sale under section 1011(b): “we are convinced that [taxpayer’s] charitable contribution of the properties must ... be treated as a sale or exchange.” Guest, 77 T.C. at 25. In reaching this conclusion, the tax court relied on Freeland v. Commissioner. “We believe the holdings of Crane and subsequent cases decided in the light of Crane mandate the conclusion that relief from indebtedness, even though there is no personal liability, is sufficient to support a sale or exchange.” 74 T.C. 970, 981 (1980) (emphasis in original). The Guest court then concluded that section 1011(b) applies “to both sales and exchanges, despite the sole use of the word sale in the statute.” 77 T.C. at 25 (citing Treas.Reg. §§ 1.1011-2(a)(1) & 1.1011-2(a)(3)).

The IRS has consistently interpreted “sale” in section 1011(b) to include gifts of mortgaged property to a charity. Treasury Regulation § 1.1011-2(a)(3) states:

If property is transferred subject to an indebtedness, the amount of indebtedness must be treated as an amount realized for purposes of determining whether there is a sale or exchange to which section 1011(b) and this section apply, even though the transferee does not agree to assume or pay the indebtedness.

Taxpayers contend that this regulation should be read to cover only “disguised sales,” rather than all gifts of mortgaged property. A disguised sale occurs when the taxpayer mortgages the property just prior to giving it to a charity. In such a case, the donor receives the cash proceeds of the loan and the charity receives the property subject to the debt. However, the Commissioner in Rev.Rul. 81-163, 1981-1 C.B. 433, made it clear he did not intend to limit the regulation to disguised sales. In Rev.Rul. 81-163 a taxpayer transferred property with a basis of 15x and a fair market value of 25x to a charity. The property was subject to a mortgage of lOx, and the charity accepted the property subject to the debt. These facts are identical to the case before us: the property’s fair market value exceeds the basis, and the basis exceeds the amount of indebtedness. Rev.Rul. 81-163 concludes that the taxpayer must allocate the basis of the property under section 1011(b).¹⁰

Taxpayers maintain that the IRS’s interpretation of section 1011(b) in Treas. Reg. § 1.1011-2(a)(3) exceeds the scope of the statute. Our review of the Commissioner’s regulations is strictly limited. We may set aside Treas.Reg. § 1011-2(a)(3) only if it is not a reasonable interpretation of section 1011(b). “The choice among reasonable interpretations is for the Commissioner, not the courts.” National Muffler Dealers Association v. United States, 440 U.S. 472, 488, 99 S.Ct. 1304, 1312, 59 L.Ed.2d 519 (1979). Treasury regulations are valid if they “implement the congressional mandate in some reasonable manner.” United States v. Correll, 389 U.S. 299, 307, 88 S.Ct. 445, 450, 19 L.Ed.2d 537 (1967). “In determining whether a particular regulation carries out the congressional mandate in a proper manner, we look to see whether the regulation harmonizes with the plain language of the statute, its origin, and its purpose.” National Muffler, 440 U.S. at 477, 99 S.Ct. at 1307.

The plain language of section 1011(b) applies to sales to a charitable organization. Neither the code nor the regulations, however, define the word sale directly.¹¹ This distinguishes the case before us from the Supreme Court cases cited by the taxpayers which have invalidated Treasury regulations because they were inconsistent with terms already defined by Congress. See, e.g., United States v. Vogel Fertilizer Co., 455 U.S. 16, 25-26, 102 S.Ct. 821, 827-28, 70 L.Ed.2d 792 (1982) (regulation inconsistent with “brother-sister controlled group” because term defined specifically by the code); Rowan Companies, Inc. v. United States, 452 U.S. 247, 254-58, 101 S.Ct. 2288, 2293-95, 68 L.Ed.2d 814 (1981) (regulation which defined “wages” to include value of meals and lodging in oil rig employees’ salaries invalid because code definition of wages excluded these items).

In the absence of specific direction from Congress, we find that the Commissioner’s regulation interpreting section 1011(b) is reasonable.¹² The congressional mandate embodied in section 1011(b) is to offset the “combined effect ... of not taxing the appreciation and at the same time allowing a charitable contributions deduction for the appreciation.” H.R.Rep. No. 413, 91st Cong. 1st Sess. 53, reprinted in 1969-3 C.B. 200, 234, U.S.Code Cong. & Admin.News 1969, p. 1699. Treasury Regulation § 1.1011-2(a)(3) thus harmonizes with the origin and purpose of section 1011(b).¹³

On balance, the cases, Treasury regulations, and revenue rulings support the tax court’s conclusion that taxpayers realized gain. Accordingly, we hold that a charitable contribution which entails relief from nonrecourse indebtedness is a “sale” within the meaning of section 1011(b).

AFFIRMED in part and REVERSED in part.

1 . "A trial judge’s decisions on qualitative matters of this type are so rarely overturned on appeal that they are, for practical purposes, conclusive.” B. Bittker, Federal Taxation of Income, Estates and Gifts 1f 132.5.2 & n. 20 (1982).

2 . This standard, however, provides little guidance for reviewing courts. As the tax court noted in an earlier opinion, the problems of valuation are "more properly suited for the give and take of the settlement process than adjudication.” Buffalo Tool & Die Mfg. v. Commissioner, 74 T.C. 441, 451-52 (1980).

3 . Taxpayers’ experts valued the agricultural land in the west tract at $650 an acre. On appeal, taxpayers have not contested the IRS’s valuation of $600 an acre.

4 . Several facts supported their appraisal:

1. Land zoned "U” or "unclassified” usually acquires the zoning of adjacent property. The "U” classification is an interim zone that affords planners flexibility to meet the changing needs of the community. Because all of the land abutting one side of the east tract was zoned industrial, the odds were good that the east tract would be rezoned for industrial uses in the future.

2. Roland Sutton, Director for Industrial Development in Placer County from 1973-1976, stated that there was no difference in terms of potential for industrial development between the 75 acres zoned "M” in the east tract and the remaining 534.03 acres. He also stated that the "U” zone did not affect his opinion of the east tract’s suitability for industrial development.

3. In December 1973 the County commissioned an engineering report to study planned industrial expansion in the area. Taxpayers' appraisers knew of this report through county officials and knew the area under study included the east tract. In 1975 the study reported that the east tract was a "logical future [extension] of the present industrial district.” The county board of supervisors accepted this finding and other county officials relied on the report for planning purposes.

4. Robert McHale, who replaced Roland Sutton as Director of Industrial Development in 1977, testified that he would have favored an application to rezone the east tract for industrial uses.

5. And finally, in 1980 Pitzer College received offers for the land ranging from $2,977 to $3,969 per acre, perhaps indicating that buyers were convinced of the land’s industrial potential.

None of these factors persuade us that the tax court’s valuation is clearly erroneous. Most of taxpayers' evidence is either speculative or relates to events after the date of transfer. For example, taxpayers argue that the offers Pitzer College received in the $3,000 to $4,000 per acre range in 1980 prove that the tax court undervalued the land. According to the government's appraisal, the donated property increased in value only 71/2% during the years 1968-1973, while climbing 500% or more from 1973-1980. Subsequent market data, however, is insufficient to set aside the tax court’s value because the relevant question is whether the court’s finding was clearly erroneous based on information available as of December 1973, the date of transfer. I.R.C. § 2512(a). Moreover, even if taxpayers could rely on hindsight, their argument would not justify reversing the tax court because changes in property value over time are not a linear function.

5 . Taxpayers argue that the tax court's value is clearly erroneous because the east and west tract received the same value. The tax court concluded that both tracts were worth $600 per acre, thereby declining to add any premium for the east tract’s industrial potential. At trial, much of the testimony concerned the probability of rezoning all of the east tract for industrial uses. Taxpayers asserted that the east tract’s industrial potential would be realized in the near future, while the government’s appraiser maintained that it might be as long as 75 years before the county needed to rezone the east tract. We uphold the tax court's decision that the portion of the east tract zoned “U" should be valued as agricultural land.

6 . The IRS determined the fair market value of the property to be $547,600 in notices mailed to all of the taxpayers except the Ebbens. In Ebben the notice of deficiency omitted the fair market value of the property, but allowed a deduction for charitable contributions of $11,-494.36. A fair market value of $872,994.29 can be derived by dividing the allowable deduction by Ebben’s partnership interest and adding the amount of the outstanding note. Thus:

Deduction allowed $ 11,494.36

Divided by Ebben’s interest .035

Total deduction $328,410.29

Add: amount of note $544,584.00

Fair market value $872,994.29

7 . The tax court attempted to explain the different values in terms of which party had the burden of proof. The taxpayers bore the burden of proving the property was worth more than the amount stated in the notice of deficiency, while the IRS had the burden of proving that the value stated in Ebben's notice was too high. This correctly states the rule, but does not justify the result. Ebben’s notice did not include a specific value for the 75 acres zoned for industrial use, just an assessment for the entire parcel donated to the college. If the tax court had adequate proof to specify a value, it should have been the same for all of the taxpayers.

8 . We note that in this case taxpayers certainly received some kind of a benefit in that they purchased the property for only $3,416 cash and took a charitable deduction of $875,416. In addition, Kaufman and Broad, who purchased the property, persumably deducted $999,211.20 prepaid interest on the purchase of the property.

9 . The IRS ■ calculated the gain for all of the taxpayers except for the Ebbens as follows:

Fair Market value = $588,996

Adjusted basis = $548,000

Nonrecourse debt = $544,584

(a) Ratio = _Debt_ = $544,584

Fair Market Value $588,996

Ratio = .9245971

(b) Allocation of basis to sale

Adjusted basis x ratio = Allocated basis

548,000 X .9245971 = $506,679.21

(c) Calculation of gain on sale

Amount realized (nonrecourse debt) $544,584.00

Less: Allocated basis $506,679.21

Gain $ 37,904.79

The same calculation in Ebben yields a gain of almost $74,000. The difference can be traced to the role the fair market value plays in the denominator of the allocation ratio. A higher fair market value results in a smaller allocated basis and hence more gain.

10 . The transaction results in 4x of taxable gain:

(a) Ratio = lOx = .40

25x

(b) Allocation = 15x x .40 = 6x

(c) Gain = lOx — 6x = 4x

11 . Treasury Regulation § 1.1002-l(d) defines "sale" indirectly: "Ordinarily, to constitute an exchange, the transaction must be a reciprocal transfer of property, as distinguished from a transfer of property for a money consideration only.” But this definition adds little to the petitioners argument beyond an appeal to common sense that the word "sale” means for money consideration.

12 . The Tax Reform Act of 1969 significantly limited the tax benefits available from charitable contributions. See, e.g., I.R.C. § 170(e)(1)(A) (restricting a taxpayer’s deduction for contributions of property which would have produced ordinary income or short-term capital gain to the taxpayer’s basis in such property); § 170(b)(1)(D) (limiting maximum charitable contribution for long-term property to 30% of taxpayer's contribution base); § 170(f)(3) (denying charitable contribution for the "free use” of property by a charity); see also Randall, Charitable Contributions After the 1969 Tax Reform Act, 11 Gonz.L.Rev. 869 (1976). Our approval of the IRS's interpretation of 1011(b) is thus consistent with the general intent of the 1969 Act to limit certain charitable contributions. The Senate initially rejected the bargain sale provision of section 1011 for fear that it would reduce charitable donations. S.Rep. No. 552, 91st Cong., 1st Sess. 82, reprinted in 1969-3 C.B. 423, 476, U.S.Code Cong. & Admin.News 1969, p. 1645. In conference between the House and Senate section 1011(b) was accepted without explanation, thus providing no insight as to the exact meaning of "sale.”

13 . The Commissioner introduced Treas.Reg. § 1.101 l-2(a)(3) twelve years ago. Our research discloses no substantial criticism of the Regulation during this period. When Treas. Reg. § 1.101 l-2(a)(3) was first offered for notice and comment, one commentator concluded that the Regulation was “too broad." Whitaker, Dealing with Outright Gifts to Charity in Kind, 30th Annual N.Y.U. Inst, on Fed. Taxation 45 (1972). The author’s argument, however, is mainly directed at cases in which the donor transfers encumbered property and agrees to pay the debt. Id. at 73-75. That is not the case before us. To the extent the article criticizes sale treatment for gratuitous transfers of encumbered property without an agreement to repay the debt, it merely offers an alternative interpretation of § 1011(b) which the Commissioner properly rejected. A rule excluding such transfers from § 1011(b) would lead to odd results. If any cash were involved in the transaction, say $100, the contribution would be a bargain sale and hence an allocated basis would be used. The amount realized would have to include the $100 and the amount of nonrecourse debt. See Crane, 331 U.S. at 1, 67 S.Ct. at 1047. It is difficult to justify why a contribution without the $100 receipt of cash should receive a different basis under § 1011(a). Treas.Reg. § 1.101 l-2(a)(3) is therefore a reasonable interpretation of § 1011(b) in light of Crane and its progeny.

Petitioners’ claim that Ebben would be the first case to apply an allocated basis for calculating gain from a gratuitous transfer is misguided. Their assertion apparently stems from an incorrect footnote in Cunningham, Payment of Debt with Property — the Two-Step Analysis after Commissioner v. Tufts, 38 Tax Lawyer 575, 616 n. 255 (1985). The author asserts that only Ebben uses an allocated basis among recent cases that raise this issue. However, the author reaches this conclusion by incorrectly stating that Guest relied on a full basis. We note that the tax court in Guest concluded that "petitioners adjusted bases for calculating his gain ... should be determined under § 1011(b), and his gain is equal to the difference between the outstanding mortgages and that portion of his adjusted bases which bears the same ratio to the adjusted bases as the amount of the mortgages bears to the fair market value of the properties." 77 T.C. at 25-26. Our decision today follows this same allocation formula.