The Internal Revenue Service has issued a revenue procedure to help taxpayers with so-called “mezzanine” financing in workouts and similar circumstances when they have debts that have been discharged in connection with real property.

Revenue Procedure 2014-20 provides a safe harbor under which the IRS will, under certain defined circumstances, treat indebtedness that is secured by 100 percent of the ownership interest in a disregarded entity that holds real property as indebtedness that is secured by real property for purposes of Section 108(c)(3)(A) of the Tax Code. The revenue procedure will assist taxpayers with mezzanine financing in workouts and similar circumstances.

The IRS noted that borrowers will often incur debt in connection with real property used in a trade or business. If the debt is later discharged, the income from the discharge of indebtedness may be excluded from gross income if certain requirements are met. In some cases, the real property is held by the borrower in an entity that is wholly owned by the borrower, and is, for federal tax purposes, disregarded as an entity separate from its owner. In these cases, the debt may be secured by the borrower’s ownership interest in the disregarded entity holding the real property.

Revenue Procedure 2014-20, will be included in Internal Revenue Bulletin 2014-09 on Feb. 24, 2014.