## Facts

- 2925 Briarpark, Ltd., a Texas limited partnership, acquired land in Houston and constructed a 12-story office building.
- The partnership borrowed $21.6 million to finance the project; the debt balance grew to about $24.7 million by the end of 1986.
- In 1987, the primary loan was modified from recourse to nonrecourse, including capitalization of $3.1 million of accrued interest; the partnership also obtained a $1.5 million nonrecourse loan for tenant improvements.
- By 1989, the property’s value had declined below the outstanding nonrecourse debt.
- The partnership arranged a cash sale of the property to a third-party buyer for $11.6 million, conditioned on the lender’s release of liens and discharge of the partnership’s obligations.
- On its return, the partnership treated the transaction as generating cancellation-of-indebtedness (COD) income and reported an overall net loss on the property’s sale.
- The IRS issued a final partnership administrative adjustment recharacterizing the transaction as gain from a property disposition, and the Tax Court sustained that determination.

## Issues

1. Whether the sale of encumbered property and the lender’s discharge of related nonrecourse debt should be treated as two events (sale loss plus COD income) or as one integrated disposition.
2. Whether, in a disposition of property subject to nonrecourse debt, the amount realized includes the discharged nonrecourse liabilities even when the property’s value is less than the debt.
3. Whether the resulting income is characterized as gain from dealings in property under I.R.C. § 61(a)(3) rather than COD income under I.R.C. § 61(a)(12).

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court treated the sale and discharge as a single, integrated transaction functionally equivalent to a foreclosure-type disposition.
- The court held that the partnership realized gain from dealings in property under § 61(a)(3), not COD income under § 61(a)(12).
- The amount realized on the disposition included the full amount of the discharged nonrecourse debt, not merely the cash sale proceeds or the property’s fair market value.

## Legal Principles

- When a taxpayer disposes of property subject to nonrecourse debt and the debt is extinguished as part of the disposition, the full nonrecourse liability is included in the taxpayer’s amount realized for purposes of I.R.C. § 1001.
- Integrated sale-and-discharge arrangements conditioned on each other are treated as a single disposition of encumbered property, rather than separated into an independent sale and a separate debt-cancellation event.
- In such a disposition, the income is characterized as gain from the property transaction under I.R.C. § 61(a)(3), rather than COD income under I.R.C. § 61(a)(12), even if the property’s value is less than the debt balance.

## Conclusion

The Fifth Circuit held that a cash sale of real property coupled with discharge of associated nonrecourse debt, where each step is conditioned on the other, is treated as one disposition in which the discharged nonrecourse liabilities are included in the amount realized, producing gain from the property transaction rather than COD income.


2925 Briarpark, Ltd. v. Commissioner, 163 F.3d 313 (5th Cir. 1999)