Page 377 - TaxAdviser_2022

CASE STUDY

Nonrecourse debt interest, that previously generated except M’s debt is nonrecourse rather
The Supreme Court’s decision in Tufts, ordinary deductions for the borrower. than recourse. Here, transferring
461 U.S. 300 (1983), resolved the main For a cash-basis borrower, however, the the property to the lender results in
issue of the tax treatment of a fore- amount realized on the deemed sale a deemed sale of the property with
closure, or deed in lieu of foreclosure, would equal only the principal balance sales proceeds equal to the balance of
transaction involving nonrecourse debt. of the nonrecourse debt. the nonrecourse debt. Thus, M rec-
Such a transaction is treated as a deemed Note: The theory that the amount ognizes a Sec. 1231 gain of $272,500
sale by the borrower to the lender realized from a deemed sale equals ($4,325,000 outstanding debt less
with proceeds equal to the amount of the full amount of nonrecourse debt adjusted basis of $4,052,500). There
nonrecourse debt. Also, an abandon- principal means there can be no COD is no COD income. ■
ment of real property encumbered by income due to a foreclosure or deed in
nonrecourse financing is treated like a lieu of transaction involving only non-
foreclosure in that there is a deemed sale recourse debt. Unlike the treatment of
of the property (Middleton, 693 F.2d 124 foreclosures involving recourse debt, the Contributor
(11th Cir. 1982)). FMV of the property is irrelevant. Also,
An Eighth Circuit decision, Allan, the insolvent or bankrupt status of the Patrick L. Young, CPA, is an executive
856 F.2d 1169 (8th Cir. 1988), con- taxpayer does not affect the results. editor with Thomson Reuters
cluded the amount realized on the Checkpoint. For more information
deemed sale includes the full amount of Example 2. Property foreclosure about this column, contact
the nonrecourse debt plus any additions involving nonrecourse debt: Assume thetaxadviser@aicpa.org.
to principal for items, such as accrued the same facts as in Example 1

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46 July 2022 The Tax Adviser