## Facts

- Taxpayer X owned and developed a residential subdivision.
- X borrowed from an unrelated bank; the loan was secured by a mortgage on the subdivision, and X was personally liable for repayment (recourse debt).
- X became insolvent within the meaning of I.R.C. § 108(d)(3) and defaulted on the debt.
- X and the bank agreed that X would transfer the subdivision to the bank, and the bank would release X from all liability on the debt.
- At the time of transfer: (1) the subdivision’s fair market value (FMV) was 10,000x; (2) X’s adjusted basis was 8,000x; and (3) the outstanding debt was 12,000x (no accrued but unpaid interest).
- X remained insolvent after the transaction.

## Issues

1. Whether transferring property to a creditor in full satisfaction of recourse debt constitutes a “sale or other disposition” producing gain under I.R.C. §§ 61(a)(3) and 1001.
2. Whether the “amount realized” for the disposition equals the property’s FMV or the full amount of the recourse debt.
3. Whether the excess of the discharged recourse debt over FMV is discharge-of-indebtedness income and, if so, whether it is excludable due to insolvency under I.R.C. § 108.

## Decision

- The transfer of the subdivision to the bank in exchange for release of recourse liability is a disposition under I.R.C. § 1001.
- X must recognize gain to the extent the property’s FMV exceeds X’s adjusted basis.
- In the example, the amount realized for disposition purposes is the FMV (10,000x), producing 2,000x of gain (10,000x − 8,000x).
- The difference between the discharged debt and FMV (12,000x − 10,000x = 2,000x) is treated as potential discharge-of-indebtedness income, subject to exclusion to the extent permitted by I.R.C. § 108(a)(1)(B) and § 108(a)(3).

## Legal Principles

- Gross income includes gains from dealings in property and income from discharge of indebtedness unless an exclusion applies. I.R.C. § 61(a)(3), (12).
- Gain from a sale or other disposition equals the amount realized minus adjusted basis. I.R.C. § 1001(a).
- For a transfer of collateral in satisfaction of recourse debt, the disposition component is measured using the property’s FMV as the amount realized, with gain recognized to the extent FMV exceeds basis.
- Any discharged recourse debt in excess of FMV is analyzed separately as discharge-of-indebtedness income under I.R.C. § 61(a)(12).
- Discharge-of-indebtedness income may be excluded if the discharge occurs while the taxpayer is insolvent, but only up to the amount of insolvency. I.R.C. § 108(a)(1)(B), (a)(3), (d)(3).

## Conclusion

A debtor’s transfer of property to a creditor in full satisfaction of recourse debt is treated as a taxable disposition that can produce gain measured by FMV minus basis, while any remaining discharged debt above FMV is addressed separately as potential discharge-of-indebtedness income that may be excluded to the extent of insolvency under I.R.C. § 108.


Rev. Rul. 90-16, 1990-1 C.B. 12 (1990)