Is it a purchase price reduction or not?

• Author: Williford, Jerry
• Position: Debt reduction agreements - Brief Article

Assume that an individual who owns a shopping center on which there is a #1 million debt enters into negotiations with the lender to modify the debt. As a result of the negotiation, the lender reduces the debt by $200,000. What is the effect of the debt reduction? It is income? Is it a reduction to the purchase price?

The key to answering these questions is to determine to whom the debt is owed. Is the lender the party from whom the individual purchased the property or someone else?

If the debt is to the seller of the property, it is clear that the $200,000 is not income under Sec. 108(e)(5), there is merely a purchase price reduction.

However, if the lender is someone else, such as a financial institution, Sec. 108(e)(5) will not apply. The IRS confirmed this position in Rev. Rul. 92-99.

Some tax practitioners believe that a purchase price adjustment exists for all acquisition debt, not just seller-financed debt. This position is based on prior case law, which did not limit that purchase price adjustment exception to seller-financed debt, as the Code does.

Unfortunately, according to Rev. Rul. 92-99, the Service will not follow these cases.

The resolution of this issue depends on whether the...