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SPECIAL GIFT SITUATIONSThe Supreme Court put the matter this way (as a contrast):When a taxpayer receives a loan, he incurs an obligation to repay that loan atsome future date. Because of this obligation, the loan proceeds do not qualifyas income to the taxpayer. When he fulfills the obligation, the repayment ofthe loan likewise has no effect on this tax liability. 478Another court subsequently completed this argument:But when someone else relieves him of his obligation to pay the loan, it is asthough the taxpayer had received cash and the transfer of the encumberedproperty to the charity is the equivalent of a sale without regard to any taxbenefit theory. 479In the case, the taxpayers contributed mortgaged property to a college, whichtook the property subject to the debt. The court wrote that “it was as if the taxpayershad been paid with cash borrowed by . . . [the college] from the mortgageeon a nonrecourse basis, and then had used the cash to satisfy theirobligation to the mortgagee.” 480The IRS consistently interprets the term sale in the bargain sale context toinclude gifts of mortgaged property to a charity. Thus,[i]f property is transferred subject to an indebtedness, the amount of indebtednessmust be treated as an amount realized for purposes of determiningwhether there is a sale or exchange . . . , even though the transferee does notagree to assume or pay the indebtedness. 481This approach was upheld by a court as being reasonable. 482This doctrine of law causes the transaction to be partially a purchase andpartially a gift. The tax basis of the property must, as noted, be allocated to boththe purchase and gift portions of the transaction in determining the capital gainto be reported. 483EXAMPLE 9.10M contributed an item of capital gain property to PC, a public charitable organization. At thetime of the gift, the property had a fair market value of $35,000. M’s basis in the property was$15,000. The property was the subject of a $10,000 mortgage.M’s charitable contribution deduction for the year was $20,000 ($35,000 – $15,000). M alsois treated as having received $10,000 as a form of consideration (relief from the mortgageobligation).Of the $15,000 basis in the property, $4,286 was allocated to the purchase element of thetransaction (10/35 × $15,000) and $10,714 was allocated to the gift element of the transaction(25/35 × $15,000). Thus, M had long-term capital gain of $5,714 as the result of thistransaction.478 Id. at 307.479 Ebben v. Commissioner, 783 F.2d 906, 912 (9th Cir. 1986). See also Commissioner v. Peterman, 118 F.2d 973(9th Cir. 1941); Guest v. Commissioner, 77 T.C. 9 (1981); Freeland v. Commissioner, 74 T.C. 970 (1980).480 Ebben v. Commissioner, 783 F.2d 906, 912 (9th Cir. 1986).481 Reg. § 1.1011-2(a)(3).482 Ebben v. Commissioner, 783 F.2d 906, 913–15 (9th Cir. 1986).483 IRC § 1011(b). See § 9.19(b). 332