Gain-Triggering Abandonment of Leasehold Subject to Nonrecourse Debt Occurred upon Agreement Transferring Substantive Ownership: L & C Springs Associates v. Commissioner
Nina S. Tallon
In L & C Springs Associates v. Commissioner, the Seventh Circuit held that, for purposes of triggering gain through debt cancellation, abandonment of property occurred when the taxpayer lessee was effectively relieved of its nonrecourse debt obligation and its leasehold interest in the property. The Seventh Circuit affirmed the Tax Court’s ruling to this effect even though the foreclosure sale and transfer of legal title took place the following year. The Seventh Circuit also held that the taxpayer’s right of redemption, if it existed at all, did not preclude recognition of gain from abandonment. This case represents the first time a circuit court has addressed the timing of abandonment in the context of gain-triggering debt cancellation.Part I of this Note presents the factual background and statutory framework of the L & C Springs cases. Part II explains the opinion of the Tax Court. Part III describes the parties’ arguments on appeal and discusses the opinion of the Seventh Circuit. Finally, Part IV analyzes the Seventh Circuit’s decision and discusses its implications.