Both parties recognize that the gain computed under the limitation provisions of section 1038(b)(2) would exceed the gain as computed by respondent under section 1038(b)(1) and recognize that the applicable section for computing gain in this case is section 1038(b)(1).

Respondent takes the position that the language of section 1038(b)(1) is mandatory, unambiguous, 1981 U.S. Tax Ct. LEXIS 112">*120 and mechanical in its 76 T.C. 1018">*1024 application. He contends that the calculation formula of section 1038(b)(1) generates a reportable capital gain because it provides for the amount of money and fair market value of other property received prior to the reacquisition to be reduced only by the amount of gain previously reported and does not permit petitioners to reduce the money received by the sales commissions and costs paid at the time of the 1974 property sale. Respondent argues that petitioners will receive a tax benefit from the commissions and sales expenses paid in 1974 since the section 1038(c) basis calculation gives petitioners a stepped-up basis in their reacquired realty. ^{41981 U.S. Tax Ct. LEXIS 112">*121}

On the other hand, petitioners argue that they are entitled to report a loss as a result of the reacquisition of the realty. Petitioners emphasize that in 1974 they reported taxable profit of and paid taxes on $ 48,891.23 while they received only $ 35,017.60 in "money." On brief, they suggest that "gain on the repossession of the property is limited to this sum of 'money'" collected. Petitioners contend that respondent's interpretation of the statute and regulations unwarrantedly creates taxable income at the time of repossession.

Petitioners' interpretation of the facts as to the "money" they received in 1974 is in error. When the purchasers of the property paid the real estate agent the $ 35,017.60 sales commission owed by petitioner, petitioner received this $ 35,017.60 as if the cash had been handed to him and he had handed it to the real estate agent. In fact, petitioners recognized that they received the $ 35,017.60 when they showed on their 1974 return as the total collected from the property in that year the amount of $ 70,035.20.

Congress1981 U.S. Tax Ct. LEXIS 112">*122 enacted section 1038 in 1964 ⁵ with several purposes in mind. Congress intended to provide a uniform method of 76 T.C. 1018">*1025 reporting gain upon the repossession of real property regardless of the method of accounting used by the taxpayer in reporting his gain or loss upon the initial sale. ^{61981 U.S. Tax Ct. LEXIS 112">*123} Recognizing the possibility that the realty might have appreciated in value between the time of the initial sale and the repossession, Congress aimed to reduce the likelihood that the initial seller-taxpayer, who might be illiquid upon repossession, would be responsible at that time for reporting large amounts of gain and paying taxes thereon. Congress directed that at repossession, gain would not be measured by reference to the fair market value of the repossessed property. ⁷ Moreover, Congress intended that the gain which a taxpayer would be responsible for reporting upon repossession should not exceed the payments he actually had received prior to that time. ^{81981 U.S. Tax Ct. LEXIS 112">*124}

While one of the purposes sought to be achieved by enacting section 1038 was to reduce the likelihood that a taxpayer would be responsible for reporting gain and paying taxes upon repossession of realty when in fact that taxpayer was not monetarily enhanced by the repossession, Congress clearly wrote the statute to require that where "a sale of real property gives rise to indebtedness to the seller which is secured by the real property sold, and * * * the seller of such property reacquires such property in partial or full satisfaction of such indebtedness," the seller must recognize gain as prescribed by section 1038(b). This language is mandatory and does not excuse any taxpayer from recognizing gain and paying taxes thereon even 76 T.C. 1018">*1026 if upon repossession the taxpayer is not in a better monetary position than if he had not originally sold the property.

Section 1038(b) directs the taxpayer to calculate by two methods the gain resulting from repossession, and the taxpayer is responsible for reporting on his income tax return 1981 U.S. Tax Ct. LEXIS 112">*125 in the taxable year of the reacquisition the lesser of the two gain calculations. Although section 1038(b)(2), the limitation subsection, specifically allows the taxpayer to reduce the gross sales price by the selling commissions, legal fees, and other expenses incident to the initial sale, subsection (b)(1) does not permit such a reduction.

If the mandatory language of section 1038(b) works a hardship on a taxpayer, who prior to repossession has not received cash in an amount equal to the reportable gain required by section 1038(b), such taxpayer is not excepted from the operations of section 1038(b)(1). These taxpayers are awarded relief by obtaining an increased adjusted basis in the repossessed property pursuant to section 1038(c). Under section 1038(c), petitioner's adjusted basis in the repossessed property will offset any gain he is required to report on the repossession.

In the taxable year in issue, section 56(a) "imposed for each taxable year, with respect to the income of every person, a tax equal to 15 percent of the amount by which the sum of the items of tax preference exceeds the greater of -- (1) $ 10,000, or (2) the regular tax deduction for the taxable year." Section 1981 U.S. Tax Ct. LEXIS 112">*126 57(a)(9) defines capital gains as a tax preference item, and provided that "(A) Individuals. -- In the case of a taxpayer other than a corporation, an amount equal to one-half of the net capital gain for the taxable year." Because we above concluded that petitioners were required by section 1038 to recognize long-term capital gain upon the 1976 reacquisition of the realty, petitioners are liable for payment of the minimum tax as imposed by sections 56(a) and 57(a)(9) on one-half of that gain.

Decision will be entered for the respondent.