- 18 -
simply a device through which nearly $4.8 million of debt would
be forgiven and that any equity interest received by ESL would be
worthless. Noting that Commercial intended to write off the
portion of debt that would be extinguished, the accountant found
that to be consistent with the treatment of other loans that were
charged-off for the year ended June 30, 1988.
Having found that the transaction resulted in cancellation
of indebtedness income, we must next decide the extent to which
petitioners must recognize income. Petitioners argue that, under
Fulton Gold Corp. v. Commissioner, 31 B.T.A. 519 (1934), there
were no accessions to their wealth because the debt cancellation
did not free assets as it would have if the nonrecourse debt had
been recourse. However, in Gershkowitz v. Commissioner, 88 T.C.
984, 1010 (1987), this Court held that a reduction in the amount
of an undersecured, nonrecourse debt by one who was not the
seller of any property securing the debt results in cancellation
of indebtedness income. See also Commissioner v. Tufts, 461 U.S.
300, 307 (1983) (nonrecourse mortgage tantamount to a true loan;
its forgiveness triggers cancellation of indebtedness income,
notwithstanding a lesser fair market value of the collateral than
the balance of the debt).
The partnerships’ transactions with Commercial arose from
debt workouts generated by a depressed real estate market.
Parker Properties and Twenty Mile borrowed funds from Empire on a
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011