- 10 -
2(c)(2), Example (7), Income Tax Regs. Moreover, the amount
realized on the disposition of property subject to nonrecourse
debt may include both the principal balance and accrued interest.
See Allan v. Commissioner, 856 F.2d 1169 (8th Cir. 1988), affg.
86 T.C. 655 (1986) (rejecting the Government’s argument that
interest should be included in the amount realized only where
such interest was included in the taxpayer’s depreciable cost
basis). Thus, the amount petitioner realized upon the
disposition of his residence in foreclosure included both the
principal indebtedness and the interest that had accrued as of
the foreclosure date.8
The inclusion of the accrued interest in the amount realized
is determinative of whether petitioner is deemed to have paid the
interest in foreclosure. We have held that where a liability is
extinguished in exchange for an asset, “the transaction is
treated as if the transferor had sold the asset for cash
equivalent to the amount of the debt and had applied the cash to
the payment of the debt.” Unique Art Manufacturing Co. v.
Commissioner, 8 T.C. 1341, 1342 (1947) (citing Peninsula
Properties Co. v. Commissioner, 47 B.T.A. 84 (1942)). Because
the amount petitioner realized in the foreclosure of his
residence included both principal and accrued interest, he is
8Respondent makes no suggestion that this was not a genuine
debt obligation. See, e.g., Estate of Franklin v. Commissioner,
544 F.2d 1045, 1048-1049 (9th Cir. 1976) (denying an interest
deduction with respect to an indebtedness that was not genuine),
affg. 64 T.C. 752 (1975).
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Next
Last modified: May 25, 2011