Thursday April 25, 2024

Rev. Rul. 81-163

GiftLaw Note:

Rev. Rul. 81-163

1981-1 C.B. 433; 1981 IRB LEXIS 497; REV. RUL. 81-163

January, 1981

Bargain sale of encumbered real property to charitable organization; computation of gain. The computation of the amount of gain recognized by an individual on the bargain sale to a charitable organization of real property subject to an outstanding mortgage is illustrated.

ISSUE

What is the amount of gain recognized by an individual on the bargain sale of real property to a charitable organization under the circumstances described below?

FACTS

During the taxable year, an individual taxpayer transferred unimproved real property subject to an outstanding mortgage of 10x dollars to an organization described in section 170(c) of the Internal Revenue Code. On the date of transfer the fair market value of the property was 25x dollars, and the taxpayer's adjusted basis in the property was 15x dollars. The taxpayer had held the property for more than one year and made no other charitable contributions during the taxable year. The property was a capital asset in the taxpayer's hands. Thus, under the provisions of section 170 the taxpayer made a charitable contribution to the organization of 15x dollars (25x dollars fair market value less 10x dollars mortgage).

LAW AND ANALYSIS

Section 1011(b) of the Code and section 1.1011-2(b) of the Income Tax Regulations provide that, if a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, the adjusted basis for determining the gain from the sale is the portion of the adjusted basis of the entire property that bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the entire property.

Section 1.1011-2(a)(3) of the regulations provides that, if property is transferred subject to an indebtedness, the amount of the indebtedness must be treated as an amount realized for purposes of determining whether there is a sale or exchange to which section 1011(b) of the Code and section 1.1011-2 apply, even though the transferee does not agree to assume or pay the indebtedness.

Because the outstanding mortgage of 10x dollars is treated as an amount realized, the taxpayer's adjusted basis for determining gain on the bargain sale is 6x dollars (15x dollars adjusted basis of the entire property X 10x dollars amount realized./. 25x dollars fair market value of the entire property).

HOLDING

The taxpayer recognizes long-term capital gain of 4x dollars (10x dollars amount realized less 6x dollars adjusted basis) on the bargain sale of the property to the charitable organization.