This is largely the result of the at-risk provision that denies members in LLCs taxed as partnerships at-risk basis for their share of LLC nonrecourse debts
Excess nonrecourse debts discharged were included in liabilities in the calculation of insolvency.
Before reviewing the rules for nonrecourse debt, it is helpful to view the relevant history of the court cases that led to the development of the rules.
vs Commissioner was one of the first cases to rule on the effect that discharging nonrecourse debt has on cancellation of indebtedness income.
The IRS ruled that the excess nonrecourse debt should be included in liabilities in the calculation of insolvency to the extent that the excess nonrecourse debt is discharged.
Discharge of $200,000 nonrecourse debt will result in the taxpayer's recognizing $50,000 of debt discharge income.
Any reduction that occurs is a result of the rules providing that members get at-risk basis for recourse debts, but not for nonrecourse debts
(except for qualified nonrecourse financing).
The Service has also indicated a willingness in its public comments to apply the same treatment to forgiveness transactions involving partnership nonrecourse debts.
28) The Service's acknowledgment of a possible distinction between CODI from recourse debts and CODI from nonrecourse debts (which triggers minimum gain chargeback under Sec.
The difference in the tax consequences of foreclosure on recourse and nonrecourse loans is significant because it establishes the principle that forgiveness of a nonrecourse debt does not trigger forgiveness of indebtedness income.
91-31,(10) however, it reversed its position, ruling that repayment of a nonrecourse debt at a discount will trigger CODI just as if the loan were recourse.
91-31 explicitly rejected this position for nonrecourse debt reductions, in essence providing that all debt reductions should be treated the same, whether involving recourse or nonrecourse debt.