government's primary argument here is that the debt instrument in question is not genuine but how do we know just saying that the value of the collateral is significantly less than the amount of the non recourse doubt is not sufficient and let me give an example suppose it you live in oregon and or california you've bought a house and you are in transaction that debt is non recourse debt let's say you bought this house and two thousand and nineteen fully leverage genuine when it was entered into and if you look at franklin and beck faces cited by the government page twenty one of their brief it's very clear you go to the source stock you want in the case they talk about purchasers so this is where i need some explanation your welfare happens that it will be landowners though is the owner of the property what i don't understand about the sequence here property is not given up at the time of the bankruptcy discharge the personal liability is killing her clients continue to remain in the house and live there and it's still their house and they still have an obligation  recourse to not recourse why isn't that as significant modification you reference a regulation in your twenty a j letter that then creates a and then that would otherwise be subject to tax but for the exclusion right it is absolutely a significant modification of my point was going to be that we have to examine this because we have a modification and we have to judicial doctrines and we have some treasury regulations to do the analysis about whether this modified good instrument is genuine one of the judicial doctrines that really goes to the heart of genuine this is the economic substance doctrine and it just does this transaction the bankruptcy discharge i can i want facts beyond tax benefits and here there are no special tax benefits because the interests the doctor before and after the transaction and it's self evident areas that i probably shouldn't wonder but i'm i'm i'm just curious so the bank the bank sold the property in the short sale and then simply issued your client the one thousand and ninety eight dollars forms right they had whatever it was one hundred and fourteen thousand dollars worth of money paid to on the interest of the bank collected quite a bit more than that but i understand that the bank was required to allocate some portion of it to to tax i'm sorry to interest and some portion of  citibank but your client didn't make any payments to citibank there's not there's no there's no monthly payments that your client was making is that a bank or citibank just to say all right of the two thousand dollars you paid us two hundred dollars of that goes to interest and eight hundred dollars of it goes to principal you're quite have been discharged doesn't owe anything if your client is getting the benefit of something they haven't paid and it seems to me that the quid pro quo if we want to look at this is an economic matter would be  that the i r s then gets to come back to your client and say you got an economic benefit because you're no longer liable on the on the note and so you acquired some you know i one hundred thousand dollars in income recourse debt did not disappear it's still there it's still real when the house is your real to your clients really what the clients only own the house until they sold it and they had to without very real right because they think they could do it effectively it was owned by the bank it's not effectively own by the bank it's their responsibility i get that if the value of the collateral is less but the question is at the time of the modification do we have a the ged remains a genuine obligation isn't that a change in the dead from something that was less favorable to more favorable does a lab results in a  cancellation of debt income no absolutely not and here's why let you post that you all are correct ok you've got toffs that tells us at the time of the sale the difference between the face value and the debt in the fair market value of the property is all including an amount realize what's taxed once there which are also telling me there was discharge indebtedness income and tax in attributes have to be reduced you're taxing it twice and when i'm saying is there's no discharge of indebtedness income because the balance sheet has that debt is still there in going back to the sticks in the bundles of argument eleven or twelve at the time doesn't apply there was no discharge of any kind you have to look at the test for discharging debt and it's income it's a balance sheet yes this obligation is still there and some of the bundle sticks i fully agree the personal liability is gone but that that is not gone it's there it's real it has to be paid at the time of the short sale by city but yeah not by your quo it's paid by law is it that citibank is paying it when i don't understand is when you buy a house when to say i bought a house and i make an agreement with my lender that i'm going to borrow money and money and i give my lender ranks they have a lien right now i'm ready to sell my house the new borrower and their new lender says wait a minute we're not buying this house coming from they're coming from my house that i've been living in that i owned and i'm on time capture in order to pay off creditors well i think you're talking about a post petition or vent so i don't see how the trustees going to get it were released from liability on a mortgage loan and had no obligation to repay it there was no debt they were released from the debt ceiling that that's not correct to say that there is no gap there bankruptcy discharge they had you know sound of oil in the area and all of a sudden the property is just you know doubled in value and over sudden this is not an underwater mortgage and then there's the sale and the bank gets back every penny of that was what is there at the bankruptcy discharge a realization of cancellation of debt income in that hypothetical at the moment of the bankruptcy discharge the debt goes away they realize an amount of income that would otherwise be taxable but for the exclusion and you know it's there for you know anything that happens at the sale is is separate there are two entirely separate events and i'm just wondering if that's true that there is a rigid a realization of income at the point of the bankruptcy discharge if in the later sarah will they actually get the full amount of the d was the amount of the income of the time of the bankruptcy destruction of the equity or i'm sorry what was the value of the property i'm sorry with a question right so at the time of the bankruptcy discharge the value of the property is much less than the balance of the law but at the subsequent sale way year later the bank gets back every penny of the amount of the of the d between the value of the property and the balance of the long range is that your view well the income would be realized when the if the property sold and the value is higher because realize realized income when they sell the property because there is enough to pay the mortgage and the property value has increased then they would be taxed on that at a two interest and some part of it the principal and whether that would make a difference for the for the for the milk of ages as well in their in their tax reporting well our position is they don't get credit for the interest hundred thousand dollars so it's less we find we find a judge columns winds of oil and when the property is sold a year later after the bankruptcy it's on for six hundred thousand dollars the bank pays itself a one hundred thousand dollars the notice just charged and then the bank is going to give  then you're in your the dead survives that is real and then carries over in the at the sale point but not at the point of bankruptcy i don't see how that is consistent well discharge right and actually for purposes of the st issue i'd like to just clarify that the cancellation of indebtedness as income issue is not pertinent to the st issue cancellation other than i've been deadness and i don't see how it's consistent to say that there is income in terms of won't forgiven house at the point of bankruptcy and that the subsequent sale when in fact the issue the just charge of indebtedness under section one only is not included in income so it is considered exam paid but i guess a sixty five dollars what i'm trying to get out with my hypothetical and you know posed the question in the oil is is the bankruptcy just charge a realization of income it is just a potentiality we don't really know until the sale what is actually going to happen and so that's my question is is there really a realisation of income at the point of the bankruptcy destroyers that could be qualified as a taxable a bad well under the only thing that remains is the lien the the debtors liability it's not there's no obligation to repay me there's no liability that is gone all there is left is the  did not involve the statues that are involved here that so clearly provide the interest is exempt income tough says that the full amount of the dad comes back for purposes of looking at what happens at the sale why is the payment of interest is a bow to the cancellation that took place at the time of the bankruptcy discharge well again didn't come back because it never went away it was a non recourse step from the beginning so there was no cancellation of indebtedness in tough it was always the  the court was just saying well if the taxpayer wants to include it in basis they have to include it in and realize so there has to be symmetry in the treatment of the jo for purposes of the amount realized so really tabs tulsa's just limited to what is the amount realized from this sale and did not deal with the cancellation of indebtedness to six no genuine indebtedness because there was because there was no unconditional existing debt have we ever apply the state of franklin to would transaction in which at the time of the you know initial sale as in this case the initial purchase there was genuine economic substance to the transaction i'm not sure your honor because that is just an extension of the widely applicable substance over form doctrine in which is set forth in the supreme court case and applicable to all different areas of chattel but as far as the the change in the transaction being being relevant here that the character of the transaction was so different at the time of the short sale from what occurred when the when the debt was initiated with it when the debt command that the tax benefit must reflect that there was that the taxpayers were no longer liable for the debt and they had no equity in the property and there was no fair market value and then the the house was completely underwater by three hundred thousand dollars there was no chance that the taxpayers could ever  is going back to the true sixty five dollars issue and that is from the signs in the case with the debt was not recourse all along but in describing the substance of what happened at the that debt and that's their explanation for applying the toss for all but that seems hard to square with your assertion that the debt disappeared for all purposes at the time of the of the taxpayer receives in a bankruptcy did the taxpayer and the taxpayers here were completely relieved of liability under their there was a not very coarse debt received their bankruptcy just charge which does relieve them from liability if it's out of if they were liable for the loan and then they really were relieved of liability for a prolonged as opposed to the because there's tax attribute reduction maybe not here but there's definitely the possibility of tax attribute reduction that's the whole point of what's going on it won't go away if there's tax attribute reduction you've got double taxation paradigm is the borrowing to that to buy a tax exempt bond the interest on the borrowing is not deductible the p p p loans that's why you don't get that or doctrines they're saying the same thing class of inc so let's take this hypothetical i buy a house assume i'm single i stay in the house for the alcool number of years for the holding period it's actually one hundred and twenty one dollars so that's when i saw that house with two hundred thousand dollars completely packed exam i don't pay a penny at times but i still get my interest deduction why is that because if i sold the house for three hundred thousand i would have actual income so one   and then let me let me just say this in kind of hit on just a little bit i don't think filing for bankruptcy is the sort of a value that triggers a genuine instrument and now it's not genuine and we have these tests we have the substance over form tests we have the economic substance doctrine we have the guidance and the kind of savings regulations that have seven that we're not supposed to take into account that it cherry ration the financial condition of the debtor when you're looking at the new debt instrument the modified debt instrument trying to determine whether it's genuine we have all these and the traders that it's ok to file for bankruptcy  the in the debt remains genuine and it's and so i would like to just say that these are the rules breaking the taxpayer's way is just it's genuine and the economic substance doctrine but you know even though that was the change that occurred to point of the bankruptcy discharge was a significant modification why isn't there why isn't the difference between those two change unless there's a substantial change in payment but there has to be a substantial change in payment expectations which we don't have here but you could argue that the effective date for the substantial change in payment expectation doesn't apply so maybe you do have a team sale or exchange let's continue now you have to have a write down of the debt you've got to get that through want to wait ten which is a modification of a debt instrument and that that rule says to go to feels like a payment from me for these reaction is to say there's no way there could be a deduction here you did make a payment for thirty bucks i follow that but it's a genuine obligation to sixty five dollars a one has no application here entire amount of the obligation is accounted for at the time of sale it's still real it's still there and just because i don't have any equity doesn't mean it's not my property and so we're not talking about a situation where we have an yes back to the point where it's tax shelter we're not talking about people who are tax shelter savant's we're not talking about tax protesters we're talking about regular old folks in the got run over in the great recession they had to file for bankruptcy they lost their house and they didn't there's nothing devious or  of the homes the last i guess were underwater if eels like the situation to your clients that should have been duplicated you know ten miles and times over there's no precedent anyplace because nobody ever tried to take this besides your client did your clients just the mortgage interest statement ok and they report in accordance with it and then that there was a notice from the iraqis to got sent to the old address that the house it was sold and if somebody be we don't have a tax court president covering this situation either i understand in my take on it is all you look i could be wrong and i and i get the point my take is always been if you just respond and say look we sold the