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nonrecourse basis as to the partnerships, secured by the real
estate which was the subject of each joint venture. In
Commissioner v. Tufts, supra, the collateral for the loan was not
retained by the borrowers upon debt cancellation. Petitioners
argue that, because they retained their collateral and settled
their debt with cash, their facts are distinguishable from Tufts,
and, thus, they should only recognize income to the extent of the
fair market value of the collateral. In Gershkowitz v.
Commissioner, supra, the taxpayers did retain collateral and pay
with cash. In Gershkowitz v. Commissioner, supra at 1014, the
taxpayers were required to recognize gain from the cancellation
of indebtedness to the extent that the balance of the debt
exceeded the cash paid on extinguishment.9
In line with Gershkowitz, we hold that the partnerships
realized income to the extent that their loan balances exceeded
the consideration paid to Commercial on extinguishment.10 This
9 Respondent’s analysis in Rev. Rul. 91-31, 1991-1 C.B. 19,
also reaches this result. In Rev. Rul. 91-31, respondent
concluded that Commissioner v. Tufts, 461 U.S. 300 (1983), and
Gershkowitz v. Commissioner, 88 T.C. 984 (1987), required
cancellation of indebtedness income to be recognized to the
extent of the principal reduction by the “nonselling” lender of
an under-secured, nonrecourse debt. Such is the case here. See
also Rev. Rul. 82-202, 1982-2 C.B. 36, wherein respondent’s
analysis concludes that United States v. Kirby Lumber Co., 284
U.S. 1 (1931), requires a taxpayer, whose nonrecourse debt
balance was reduced by the lender, to recognize cancellation of
indebtedness income in an amount equal to the debt reduction.
10 The parties agree that unpaid interest incurred on the
(continued...)
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