In August 1970, John Tufts and the remaining appellants formed a general partnership for the purpose of constructing an apartment complex in Duncanville, Texas. The partnership arranged for a loan of approximately.$1.8 million in order to finance construction of the complex. The mortgage note covered the entire cost and provided that neither the partnership nor the partners were personally liable for its repayment. The complex was completed in August 1971. Due to adverse economic conditions in the Duncanville area, the income generated by the complex was never enough to enable the partnership to make payments on the mortgage principal. As of August 28, 1972, the fair market value of the property had declined to.$1.4 million, and the principal balance due on the mortgage note remained at.$1.8 million. On that date, each partner sold his partnership interest and all of his right, title, and interest in property owned by the partnership to Fred Bayles, an unrelated third party.1 Mr. Bayles agreed to pay the expenses incurred by the partners as a result of the sale, up to $250. He paid no other consideration, and acquired the complex subject to the nonrecourse liability.

Each partner had included his proportionate share of the entire.$1.8 million in computing his basis in the partnership, and the Commissioner did not dispute the propriety of that computation. The Commissioner, however, included the full amount of the partnership nonrecourse liability in the amount realized upon the sale and therefore determined that each of the partners had realized a gain on the sale of his partnership interest.2 The partners appealed to the tax court, arguing that nonrecourse liabilities should be included in amount realized only to the extent of the fair market value of the partnership property securing the indebtedness. The tax court upheld the Commissioner, and the taxpayers filed this appeal.

The Supreme Court held in Crane v. Commissioner, 331 U.S. 1, 67 S.Ct. 1047, 91 L.Ed. 1301 (1947), that when property subject to a mortgage on which the owner of the property assumes no personal liability is sold, the amount realized includes the amount of the unassumed mortgage.3 In footnote 37 of the Crane opinion, however, the Court observed:

Obviously, if the value of the property is less than the amount of the mortgage, a mortgagor who is not personally liable cannot realize a benefit equal to the mortgage. Consequently, a different problem might be encountered where a mortgagor abandoned the property or transferred it subject to the mortgage without receiving boot. That is not this case.

331 U.S. at 14 n.37, 67 S.Ct. at 1054. The question presented by this appeal is whether footnote 37 creates an exception to the Crane holding through its clear implication that the amount realized on the disposition of property encumbered by a nonrecourse mortgage cannot exceed the fair market value of the property. Our analysis of the reasons underlying the Crane decision leads us to the conclusion that such a fair market value limitation is warranted. We therefore reverse the judgment of the tax court.

The Commissioner relies primarily on the decision in Millar v. Commissioner, 577 F.2d 212 (3rd Cir.), cert. denied, 439 U.S. 1046, 99 S.Ct. 721, 58 L.Ed.2d 704 (1978). The Millar court rejected a literal reading of footnote 37 in view of what it thought to be the principal reason underlying the Crane decision. The court focused on the following language:

The crux of this case, really, is whether the law permits her to exclude allowable deductions from consideration in computing gain. We have already showed that, if it does, the taxpayer can enjoy a double deduction, in effect, on the same loss of assets.

557 F.2d at 215, quoting Crane, 331 U.S. at 15-16, 67 S.Ct. at 1055. According to the Millar panel, the Supreme Court was primarily concerned that the taxpayer might enjoy some sort of double deduction. The tax court below, as well as the Commissioner on appeal, agreeing with Millar, also identified this concern for double deductions as the principal reason for the Crane holding. They invoke the Crane double deduction language in support of a tax benefit theory: the argument, in essence, is that a taxpayer who has previously enjoyed the benefit of large tax deductions, without placing his own assets at risk, has, by taking those deductions, improved his economic position, thus realizing gain. According to the Commissioner and the tax court, the taxpayer, on disposing of the property, must somehow be made to account for the benefits previously enjoyed.

We do not agree that this concern for double deductions was the principal reason underlying the Crane decision. The Crane language leaves no doubt that the Court thought that Mrs. Crane had improved her financial condition by availing herself of the allowable deductions. But before the Court had even mentioned double deductions, it had already concluded that the Commissioner had properly determined the amount realized. After reaching that conclusion, the Court acknowledged the distinction between statutory income (that which Congress has decided to reach through legislation) and constitutional income (that which Congress has the power to reach, if it chooses to do so). Mrs. Crane had argued in the alternative that she had been taxed on what was not income within the meaning of the sixteenth amendment. The Court responded to this constitutional argument in the last paragraph of its opinion, and in that last paragraph the Court for the first time expressed concern for double deductions. We therefore prefer to read this expression of concern as primarily a response to Mrs. Crane's constitutional argument, and not as the principal justification for the statutory holding that the Court had announced earlier in the opinion.4

There is an even more compelling reason why the fact that a taxpayer has previously enjoyed the benefit of large depreciation deductions is insufficient to justify an expansion of the definition of amount realized. We see, by looking to the Internal Revenue Code, that Congress has already in fact accounted for those previous deductions. According to the Code, "gain" from the sale or other disposition of property is computed by subtracting the "adjusted basis" from the "amount realized." I.R.C. § 1001(a). The "adjusted basis" is the cost of the property adjusted to reflect the depreciation, depletion, and other costs chargeable against the property. I.R.C. § 1016. Thus, any tax benefits that the taxpayer may have received in the form of prior deductions have already been factored into the gain equation through adjustments to basis. Since those deductions have been accounted for through adjustments to basis, it follows logically that they cannot also support an expansion of the definition of amount realized. To account for those deductions twice in the same equation by expanding the definition of amount realized as well as adjusting basis downward would, we think, be taxing the taxpayer twice on the same component of gain.5 The Commissioner's reliance on a theory of tax benefit, then, is misplaced. The Code clearly provides for a "recapture" of the prior deductions,6 but not through its definition of amount realized.

When we look to what the Court said immediately before it announced its conclusion that the Commissioner had properly determined the amount realized, we see that the Court justified its result on a theory of economic benefit, first recognizing that the term "amount realized" could be expanded where an economic benefit equivalent to cash could be identified. The Court began by noting that if Mrs. Crane had been personally liable on the mortgage and the purchaser had either paid or assumed it, the amount so paid or assumed would clearly have been considered a part of the amount realized because Mrs. Crane would have received the benefit of the payment "in 'as real and substantial (a sense)' " as if the money had been paid to her and then paid over by her to her creditors. 331 U.S. at 13, 67 S.Ct. at 1054, citing United States v. Hendler, 303 U.S. 564, 58 S.Ct. 655, 82 L.Ed. 1018 (1938). That proposition and the economic principle from which it derives are indisputable: when a debt on which a taxpayer is personally liable is discharged, the taxpayer is freed from the necessity of paying the obligation with cash or other assets equal in value to the principal amount of the debt. United States v. Kirby Lumber Co., 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131 (1931). What the Court thought followed from that proposition, however, is worth quoting:(W)e 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. [37 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 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. 38 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.

331 U.S. at 14, 67 S.Ct. at 1054-55 (emphasis added).

This economic benefit theory is, we think, seriously flawed, in that it is premised on the notion 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." We admit that we initially succumbed to the facile appeal of that notion, but on reflection we are convinced that it rings true only so long as the taxpayer actually wants to keep the property.7 If the taxpayer decides, for any reason whatsoever, that he no longer wants the burdens and responsibilities that accompany ownership, he can transfer the property to a third party with absolutely no regard to that party's willingness or ability to meet the mortgage obligations, yet rest assured that his other assets cannot be reached. We agree with Professor Bittker:

Relief from a nonrecourse debt is not an economic benefit if it can be obtained only by giving up the mortgaged property. It is analogous to the relief one obtains from local real property taxes by disposing of the property. Like nonrecourse debt, the taxes must be paid to retain the property; but no one would suggest that the disposition of unprofitable property produces an economic benefit equal to the present value of the taxes that will not be paid in the future.

Bittker, Tax Shelters, Nonrecourse Debt, and the Crane Case, 33 Tax L.Rev. 277, 282 (1978). We do not deny that Mrs. Crane received some benefit: a purchaser had to pay off the mortgage or at least be willing to take the property subject to the mortgage before Mrs. Crane could pocket her $2500 in equity. We do, however, seriously question whether the full amount of nonrecourse debt is an accurate measure of that benefit.

Because, as indicated above, we have serious reservations about the Crane decision, we decline to extend it beyond the facts of that case, and we therefore conclude that the fair market value limitation so "(o)bviously" anticipated by footnote 37 is warranted. We hold that the fair market value of the property securing a nonrecourse debt limits the extent to which the debt can be included in the amount realized on disposition of the property.8

I concur with the result reached by our panel because the Commissioner's position is 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 "distort(ion of) the definition of amount realized."

With admiration for the logical rigor exhibited in the majority's analysis of this 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 appeal1 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 Crane-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 nonrecourse 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 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 nonrecourse 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 nonrecourse debt less the deductions taken.