Dogskin Enterprises is an LLC that has elected to be taxed as a partnership. Six years ago, Dogskin bought an office building in a growing suburb of a nearby city, paying $200,000 down and taking out a recourse mortgage for $800,000. Despite a promising beginning, things have not gone well with renting the building and Dogskin defaulted on its loan early in 2021. Rather than see the mortgagee foreclose on the building, Dogskin last week negotiated a deal with the lender where the company signed over a deed in lieu of foreclosure and the lender discharged the debt. At the time, the fair market value of the building was $650,000, the principal balance on the loan was $750,000, and Dogskins basis in the property was $550,000.

a.Assume Dogskin is solvent after the discharge. What are the tax consequences of the agreement to Dogskin?

b. Assume the same facts as above, except Dogskin Enterprises is insolvent both before and after the discharge.