2925 Briarpark, Ltd. v. Commissioner

The 2925 Briarpark, Ltd. partnership (Briarpark) (plaintiff) used a substantial mortgage-backed bank loan to finance the purchase and renovation of an office building. Over time, the building drastically depreciated in value. Briarpark subsequently defaulted on repaying the loan. The bank agreed to forgive the loan if Briarpark sold the building. The bank identified a buyer who agreed to purchase the building for far less than the remaining balance on Briarpark’s bank loan. The buyer conditioned the purchase on cancellation of the loan and release of the building’s mortgage. The parties agreed on these terms and closed on the building’s sale. Briarpark assigned the sale proceeds and all of Briarpark’s other assets to the bank and then went out of business. On Briarpark’s federal Internal Revenue Service (IRS) income tax return for the year, Briarpark reported the sale price as taxable income. Briarpark reported the debt cancellation as discharge-of-indebtedness income, which was nontaxable due to Briarpark’s insolvency. The IRS audited Briarpark’s return, reclassified the debt forgiveness as part of the building’s sale proceeds, and assessed a capital gains tax against the amount of debt forgiveness. Briarpark contested the assessment and sued the IRS through the agency’s commissioner (defendant). The United States Tax Court upheld the IRS’s assessment. Briarpark appealed to the Fifth Circuit.