Clarification of the fair market value calculation for the discharged QRPBI exclusion.

• Author: DuPree, Duane
• Position: Qualified real property business indebtedness

An exclusion of income from a discharge of qualified real property business indebtedness (QRPBI) under Sec. 108(a)(1)(D) is available to taxpayers that are not C corporations. The exclusion does not apply to a discharge that takes place in a Title 11 bankruptcy case and not to the extent the taxpayer is insolvent. Recently issued Chief Counsel Advice (CCA) 201623009 clarifies some of the rules regarding the limitations on the amount of the exclusion imposed by Sec. 108(c)(2).

According to Sec. 108(c)(3), QRPBI is debt that:

(A) was incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property,

(B) was incurred or assumed before January 1,1993, or if incurred or assumed on or after such date, is qualified acquisition indebtedness, and

(C) with respect to which such taxpayer makes an election to have this paragraph apply.

The term "qualified acquisition indebtedness" means indebtedness incurred or assumed to acquire, construct, reconstruct, or substantially improve the property.

CCA 201623009 discusses two interpretations of the meaning of real property under Sec. 108(c)(3). Under one interpretation, real property refers to all real property held by a taxpayer that has some debt that is QRPBI. When there are two items of real property, each with its own debt, the fair market value (FMV) of both properties would be considered in determining the QRPBI exclusion.

Under a second interpretation, real property relates to the sole item of real property that had debt discharged that is QRPBI. When a taxpayer holds two items of real property, each with its own debt, the FMV of only the property with the discharged debt that is QRPBI would be taken into consideration for the QRPBI exclusion. The CCA states that the second interpretation that property refers to one and only one item is the correct interpretation.

In clarifying this matter, CCA 201623009 states that "the term 'qualified real property business indebtedness' ... refers only to debts that are QRPBI with respect to the same item of real property" in Sec. 108(c)(3)(A).The CCA gives the following example:

The Taxpayer owns two items of real property used in a trade or business, Property A and...