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707(a), 721; Barenholtz v. Commissioner, 77 T.C. 85 (1981); Otey
v. Commissioner, 70 T.C. 312 (1978).
The partnerships paid $650,000 less than Commercial was
willing to accept. Therefore, Riverbank (not a party in these
cases) purchased nearly $11.5 million mortgages for just over 5
percent, or $650,000, above their fair market value. This
enabled the partnerships to achieve debt relief from Commercial
and also provided Riverbank with new mortgages. Parker
Properties and Twenty Mile did not pay the $650,000.
Both parties to the transaction had a business purpose for
its consummation; Commercial realized cash on the sale of the
mortgages, and Riverbank obtained assets. As part of the
purchase, Riverbank, not the partnerships, is entitled to account
for their acquisition. Furthermore, if the conditions warranted,
Riverbank (not the partnerships) might be entitled to any
potential bad debt deductions. See generally sec. 166. To hold
that the partnerships should reduce their cancellation of
indebtedness income by the $650,000 another entity paid would
ignore the realities underlying the separate mortgage purchase
agreement and the practical effects of Riverbank’s separate role
as the buyer. Accordingly, the partnerships are not entitled to
reduce their income by the $650,000 premium paid by Riverbank.
To reflect the foregoing,
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