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1. Income resulting from the satisfaction of a
debt for less than the amount owed is always excluded from income.
2. Section 61(a)(12) sets forth the general rule
concerning the treatment of income from cancellation of indebtedness
("CODI").
3. In addition to the exceptions described in §108,
taxpayers may avail themselves of several judicially created
exceptions to the rule of §61(a)(12).
4. Section 108(a) does not apply to solvent
taxpayers.
5. A taxpayer must satisfy each and every one of
the exclusions described in §108(a) in order to exclude CODI from
income.
6. A taxpayer may elect to have §108 apply.
7. In some instances, bankrupt and insolvent
taxpayers might be excluded from employing §108(a) for the purpose of
excluding CODI.
8. For purposes of §108(a), a taxpayer is
bankrupt if a bankruptcy petition has been filed concerning him.
9. A taxpayer is insolvent if the amount of his
liabilities exceed the basis of his assets.
10. The amount of CODI excludible from income
under the insolvency exception of §108(a)(1)(B) may not exceed the
amount by which the taxpayer was insolvent immediately before
discharge.
11. Contingent liabilities may always be counted
as liabilities for purposes of §108(a)(1)(B).
12. Assets exempt from the claims of creditors
under state law should nevertheless be considered when conducting an
insolvency determination.
13. A taxpayer who excludes CODI under §108(a)
must reduce the amount of his tax attributes by the amount of CODI
excluded.
14. Debts which are deductible by the taxpayer do
not create CODI.
15. Section 108(e)(5) applies to all taxpayers.
16. Debt reduction granted by the seller of
property to the purchaser of property may always be excluded from
gross income.
17. CODI results if a person related to the
taxpayer purchases the taxpayer's debt from a party unrelated to the
taxpayer for less than the amount owed.
18. A son-in-law is not a related party for
purposes of §108(e)(5).
19. The United States Tax Court and IRS are at
odds over how exempt assets should be treated when determining a
taxpayer's insolvency.
20. Accrual basis taxpayers are less likely to
utilize the exclusion from income set forth in §108(e)(2). |
