Section of Taxation Publications
  VOL. 55
NO. 3
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Discharge of Nonrecourse Liability Versus Discharge of Third Party Indebtedness: Friedland v. Commissioner
Ashton Valente


In Friedland v. Commissioner, the Tax Court held that the amount realized on a sale or disposition of property under section 1001(b) does not include the value of any indebtedness discharged on behalf of a third party. The taxpayer transferred appreciated stock to a bank in exchange for the discharge of his adult son’s indebtedness to the bank. The court held that, under Regulation section1.1001-2(a)(1), the amount realized from a sale or other disposition of property includes only the amount of liabilities from which the transferor himself is discharged as a result of the transaction. The taxpayer realized no gain on the transfer of appreciated stock to the bank because the taxpayer’s son, and not the taxpayer, was discharged of liability to the bank. Thus, the court held that, with no amount realized, the taxpayer had no gain and there was no taxable event.

Part I of this Note presents the factual background of the Friedland case. Part II explains the decision of the Tax Court. Part III analyzes the Tax Court’s decision and demonstrates how it blurs the line between two distinct situations that should be treated differently for tax purposes. Part IV concludes that the Tax Court incorrectly decided Friedland because it relied on the wrong line of cases and the wrong regulation section.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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