- 11 -
Petitioner obviously was surprised by respondent’s raising of a
new issue on brief that required additional evidence to decide.
Moreover, we find respondent’s reliance on Cozzi v.
Commissioner, 88 T.C. 435 (1987), to be misplaced. In Cozzi, the
Commissioner contended that the taxpayers realized discharge of
indebtedness income upon their abandonment of worthless
collateral securing a nonrecourse liability. The taxpayers in
Cozzi contended that they did not realize discharge of
indebtedness income because they did not abandon the collateral
during the year in issue.12 Id. at 446. We held that the facts
and circumstances evidenced an abandonment of worthless
collateral by the taxpayers during the year in issue and that
such an abandonment of worthless collateral securing a
nonrecourse liability established a discharge of the underlying
liability. Id. at 445-448. Cozzi did not involve a dispute of
whether a debtor’s abandonment of collateral should be treated
for Federal income tax purposes as generating income from a sale
or from a discharge of the underlying nonrecourse liability.
We now turn to an analysis of the Federal income tax
treatment of the loan default and abandonment of the collateral
based upon the assumption that the loan was recourse. In
contrast to a nonrecourse liability, a debtor’s abandonment of
12The taxpayers in Cozzi appear to have conceded that
discharge of indebtedness income would result from an abandonment
of the collateral.
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