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Briarpark transferred its cash reserves of $177,495 to NCNB. As
of December 31, 1989, Briarpark had no assets and ceased business
operations.
On its 1989 Federal partnership income tax return, Briarpark
reported cancellation of indebtedness income (COI income) of
approximately $14,468,154 as a result of the November 3, 1989,
agreement. The reported amount is calculated as follows:
Modified loan balance $24,562,763
Build-out loan balance 1,019,418
Total loan balance 25,582,181
Less sale proceeds from Dan Associates (10,936,532)
Less cash reserves paid to NCNB (177,495)
Net COI income 14,468,154
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Discussion
The parties do not dispute that the loans were nonrecourse
during 1989. The issue before us is whether the income realized
from the discharge of the loans should be treated as gains
derived from dealings in property includable in gross income
under section 61(a)(3) or as cancellation of indebtedness (COI)
income within the meaning of section 61(a)(12).
Petitioner contends that the discharge of $14,468,154 of
Briarpark's modified and build-out loans (loans) by NCNB should
be characterized as COI income under section 61(a)(12).
Respondent argues that the entire balance of the loans must be
included in the amount realized and that the resulting gain is
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