In order to deduct the loss, tax law requires the lender in a partially-worthless business bad debt to satisfy the IRS the debt is recoverable only in part. It uses the same criteria (although different rules) as a normal bad debt and is a question of fact, requiring consideration of all pertinent evidence, including the debtor's financial condition and the value of any security for the debt.
Say a person has two properties. One is recourse and upside down and the other has a lot of equity. What do *you* think a bank would be *required* to do under the law in order to deduct the loss of the difference between the amount owed and the value of the property on the recourse debt?
It depends on the amount of money we're talking about, the amount of the equity in the other property, how much other assets are owned by the borrower and the like. No one can answer what a bank will do until all the facts are out. We only know what they must do if they want to not pay taxes on the money they lost in the bad debt. Of course, they also must issue the 1099 if the loss exceeds the statutory amount if they want to deduct the loss.
When you are a Bear of Very Little Brain, and you Think of Things, you find sometimes that a Thing which seemed very Thingish inside you is quite different when it gets out into the open and has other people looking at it.
--W. T. Pooh (aka A. A. Milne)