IRS Says Suspended Passive Losses Freed-Up In Transaction Involving Excludible Cancelled Debt.

In this Chief Counsel's Advice, the facts involved a taxpayer that had purchased a rental property for $1 million via a recourse loan.  The property generated suspended passive activity losses.  Later, a lender foreclosed on the property when the balance owed on the loan was $900,000, the fair market value was $825,000 and income tax basis was $800,000.  The transaction, therefore resulted in $25,000 of gain realized and recognized to taxpayer and CODI of $75,000.  The taxpayer was insolvent and, therefore, the CODI was excluded from income under I.R.C. Sec. 108(a)(1)(B).  The IRS determined that the transaction was a "fully taxable transaction" in accordance with I.R.C. Sec. 469(g)(1)(A) which freed-up the suspended losses to be used against the taxpayer's other income.  The suspended losses were not reduced as a tax attribute due to the suspended losses.  While there is no regulation that governs the situation (Treas. Reg. Sec. 1.469-6 is reserved) IRS determined that legislative history showed that the "fully taxable transaction" rule was intended to apply to any situation where the ultimate gain or loss could be determined.  C.C.A. 201415002 (Feb. 11, 2014).

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

RSS​ Facebook Twitter