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2. Amadeus borrowed $100,000 from First Bank.

Later, when Amadeus was
insolvent, First Bank accepted a parcel of unencumbered land (with a value of
$80,000 and an adjusted basis of $50,000) from Amadeus in full satisfaction of
the recourse debt. Prior to the transfer, Amadeus’ assets consisted of the
parcel of land and some household effects with a total value of $45,000.
Amadeus’ liabilities included the $100,000 debt to First Bank and $40,000
indebtedness to another bank. In addition, Amadeus has personally
guaranteed a $5,000 bank loan that his daughter took out and there is a
“50/50 chance” he will have to pay it.
(a) How much income, if any, must Amadeus report as a result of the
settlement of the debt owed to First Bank?
• I.R.C. § 61(a)(12) Income = $5000
o Amount of A’s insolvency, calculated under I.R.C. § 108(d)(3), is
$15,000.
§ FMV of Assets = $125,000
• Land = $80,000
• Household effects = $45,00
§ Amount of Liabilities = $140,000
• Firth Bank debt = $100,000
• Other bank debt = $40,000
• Guarantee does not count. See M&M p. 65 (more
probable than not standard).
o Potential CODI = $20,000.
o Per I.R.C. § 108(d)(3), excluded CODI limited to insolvency. So, only
$15,000 is excluded. Rationale:
§ Before discharge, net worth was negative. No CODI for bring
net worth from negative up to zero.
§ But, after discharge, A has net worth of $5,000. This should be
taxable to him.
o [LECTURE ONLY] Reduce tax attributes (e.g., AB) by $15,000. Why?
§ Consider reduction of AB down to $15,000.
§ When TP actually sells, he has income.
§ Similar to deferral, not forgiveness.
• I.R.C. § 61(a)(3) Income = $30,000.
o Transferred land to bank.
§ AR = $80,000. This is how much debt he repaid.
§ AB = $50,000. This is from the facts.
o Treas. Reg. § 1.1001-2(c)(Ex. 8).
o Section 108 exclusion does not apply to this $30,000 of income. See
Treas. Reg. § 1.1001-2(a)(2), M&M p. 67.
(b) What are the tax consequences to First Bank upon acceptance of the land
in satisfaction of the debt? Specifically, what is First Bank’s basis in the land,
and is First Bank entitled to any deductions? See IRC § 166(a).
[***SKIP***]

§ 1.000 cash in satisfaction of the debt. Treas.000 to purchase Amadeus’ land). Reg. Moreover.166-2(a)-(b).000 business bad debt deduction under section 166(a). Treas.166-1(c).000 basis in the land (same basis the bank would have if Amadeus gave the bank $80. the debt became worthless within this tax year. .First Bank will have an $80. Reg. and the bank used the $80. § 1. This was a bona fide debt. First Bank will be entitled to a $20.