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investment-type property. It is the scope of "investment-type
property" that is at issue herein. Section 1.148-1(b), Income
Tax Regs. states:
Investment-type property includes any property, other
than property described in section 148(b)(2)(A), (B),
(C), or (E), that is held principally as a passive
vehicle for the production of income. Except as
otherwise provided, a prepayment for property or
services is investment-type property if a principal
purpose for prepaying is to receive an investment
return from the time the prepayment is made until the
time payment otherwise would be made. * * *
Unquestionably, petitioner, by prepaying the remaining city
obligation, extinguished its preexisting debt. While petitioner
received an economic benefit from prepaying its debt, we do not
think it was paying for property. Petitioner purchased or
received nothing, beyond the State fund obligation it received
under the 1967 transaction, other than the discount for prepaying
its obligation to the State. Such discounts normally are
considered discharge of indebtedness income, not investments.
Sec. 61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1
(1931); Consolidated Edison Co. of New York, Inc. v. United
States, 10 F.3d 68 (2d Cir. 1993); Michaels v. Commissioner, 87
T.C. 1412, 1417 (1986) ("the discount here at issue was realized
by the prepayment, which is not considered a sale or exchange").
In cases where a purchase-money debt is owed to the seller, the
reduction generally is treated as a purchase price adjustment.
Sec. 108(e)(5); House v. Commissioner, T.C. Memo. 1995-92.
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