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Tax Law Roundup current law developments in U.S. taxation

Category Archives: Cancellation of Debt Income

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IRS Ruling Addresses LLC Eligibility for Cancellation of Debt Exception

Posted in Cancellation of Debt Income, Partnership/LLC, Real Estate, Workouts

In new CCA 201525010, the IRS addressed the issue of whether a general “exculpatory” debt of an LLC is recourse or non-recourse for purposes of classifying debt-relief as potential cancellation of debt (COD) income. Recourse treatment means the debt forgiveness creates COD income. Non-recourse means the debt relief is treated as proceeds from the sale… Continue Reading

IRS Will Not Follow Partner COD Bankruptcy Exception Cases

Posted in Bankruptcy, Cancellation of Debt Income, Partnership/LLC

In a new Action on Decision (AOD 2015-10), the IRS stated that it will not follow the Tax Court’s 2004 Martinez decision, which had allowed a general partner to exclude cancellation of debt (COD) income from a partnership in bankruptcy.  Mr. Martinez was a general partner who guaranteed the partnership’s debt, and the bankruptcy court… Continue Reading

IRS Clarifies Mezzanine Real Estate Loan Structure Qualifies for COD Exception

Posted in Cancellation of Debt Income, General, Partnership/LLC, Real Estate

New Rev. Proc. 2014-20 allows “mezzanine” real estate loans to qualify for the Section 108(c) cancellation of debt (COD) income exception.  When a lender forgives debt associated with a qualifying real estate loan, the borrower can avoid tax on the COD income by instead electing to reduce tax basis if the loan is “secured by”… Continue Reading

Final Regulations Address Temporary Exception to Cancellation of Debt Income

Posted in Cancellation of Debt Income, General, Passthrough Entity, Workouts

During the recession Congress passed Section 108(i), allowing taxpayers to elect under Section 108(i) to defer Cancellation of Debt (COD) income from 2009 and 2010 so that the income is taxed 20% a year from 2014-2018.  Because of the short timing the IRS addressed taxpayers’ immediate questions through Rev. Proc. 2009-37 and two sets of… Continue Reading

Cancellation of Partnership Loan to Partner is Deemed Cash Distribution

Posted in Cancellation of Debt Income, Partnership/LLC

The IRS issued new PLR 201314004, treating a partnership cancellation of historical partnership loans to a partner as a cash distribution to the partner on the cancellation date.  Thus the partner avoided cancellation of debt income and is instead subject to the normal tax rules for a cash distribution.  The IRS noted that this is… Continue Reading

New IRS Safe Harbor on When COD Is Qualifying Income for Publicly Traded Partnerships

Posted in Cancellation of Debt Income, Partnership/LLC, Passthrough Entity

The IRS issued Rev. Proc. 2012-28, providing a helpful safe harbor for publicly traded partnerships (PTPs) to avoid non-qualifying PTP income from debt cancellation.  Prior to this guidance, PTPs did not have clear guidance on whether Cancellation Of Debt (COD) income was qualifying income for PTP qualification purposes.  PTPs need minimum amounts of qualifying income… Continue Reading

IRS Clarifies Partner Insolvency Computation for COD Exception

Posted in Bankruptcy, Cancellation of Debt Income, General, Partnership/LLC, Real Estate

The IRS issued new Rev. Rul. 2012-14 on applying the Section 108 insolvency exclusion to Cancellation Of Debt (COD) income from a partnership. The IRS clarified that discharged partnership nonrecourse debt should be allocated among the partners based on the way the partners share the COD income.  Thus if a partner receives a disproportionate amount… Continue Reading