Rev. rul. 2016-15 and the uniform application of sec. 108 to QRPBI.

• Author: Murad, Jihan
• Position: Qualified real property business indebtedness

In June 2016, the IRS issued Rev. Rul. 2016-15 to clarify the correct and uniform application of tax laws for treatment of qualified real property business indebtedness (QRPBI) on real property used in a trade or business. This revenue ruling provides that real property developed and held by a taxpayer for lease in its leasing business is "real property used in a trade or business," but real property held primarily for sale to customers in the ordinary course of business is not "real property used in a trade or business," under Sec. 108(c)(3)(A).

Main Issues

How is the real property used in trade or business defined? If a taxpayer develops and holds the real property for lease in the leasing business, is the real property classified as used in a trade or business under Sec. 108(c)(3)(A)? On the other hand, if a taxpayer develops and holds the property primarily for sale to customers in the ordinary course of business, is the real property classified as used in a trade or business under Sec. 108(c)(3)(A)?

Overview

In general, gross income includes any amount that would be includible by reason of discharge of a taxpayer's indebtedness. However, Sec. 108(a)(1)(D) provides that a taxpayer that is not a C corporation may exclude from gross income a discharge of indebtedness if the canceled debt is QRPBI. QRPBI is defined in Sec. 108(c)(3) as indebtedness that (1) is incurred or assumed by the taxpayer in connection with real property used in a trade or business and that is secured by such real property; (2) was incurred or assumed before Jan. 1, 1993, or, if incurred or assumed on or after that date, is qualified acquisition indebtedness; and (3) with respect to which the taxpayer makes an election to exclude from gross income. Qualified acquisition indebtedness is generally defined as indebtedness incurred or assumed to acquire, construct, reconstruct, or substantially improve the real property.

Under Sec. 1017, if a taxpayer excludes cancellation-of-debt (COD) income from QRPBI, the taxpayer must reduce its basis in depreciable real property by the same amount. In some circumstances, a taxpayer can elect to treat as depreciable property real property that is stock in trade or other property included in inventory or held by a taxpayer primarily for sale to customers in the ordinary course of its trade or business. However, this election does not apply in the case of any amount applied to reduce basis under Sec. 108(c)(1) (relating to QRPBI).

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