Last updated 14 May 2013
26 USC § 108
26 U.S.C. § 108 is entitled “Income from discharge of indebtedness.” It is part of Title 26, “Internal Revenue Code.”
Table of Contents for this topic:
- Text of statute
- Related statutes, rules, and forms
- Cases
- Commentary
- Exceptions
- Practice pointers
- External links
Text of statute
Related statutes, rules, and forms
- 26 USC 61(a)(12) – gross income includes income from discharge of indebtedness
- 26 USC 6050 P – “Returns relating to the cancellation of indebtedness by certain entities” ( see also IRS Reg. § 1.6050P-0, et. seq.)
- 26 USC 6201(d) – “Assessment Authority”
- IRS Form 982 – Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)
- IRS Form 1099-C – Cancellation of Debt (instructions)
Cases
Commentary
Income from discharge of indebtedness (DOI) income is sometimes called forgiveness of indebtness (FOI) or cancellation of debt (COD) income.
Overview. Cancellation of certain debt is income for tax purposes. 26 USC 61(a)(12). Generally, cancellation of –
- principal is taxable.
- interest that could have been deducted if paid is not taxable. 26 U.S.C. § 108(e)(2).
- interest that could not have been deducted if paid is taxable.
Note: The 1099 form does not distinguish between interest that must be treated as income and interest that is not income.
Reporting – creditor. Under certain circumstances the former creditor is required to report the debt cancellation.26 USC 6050 P (IRS Form 1099-C). The instructions for form 1099-C provide lists of those creditors that must, and those that need not, report cancellation of debt. See also IRS Reg. § 1.6050P-0, et. seq.
Reporting – debtor. Note that most taxpayers who are in a position to receive a cancellation of debt have no attributes to reduce. Nevertheless, they must file IRS Form 982 with their 1040 return. It the cancellation arose as the result of a bankruptcy discharge the taxpayer should attach a copy of the bankruptcy petition and the discharge.
Exceptions
Under certain circumstances, including insolvency or discharge in bankruptcy, the debtor may exclude the debt cancellation income. 26 U.S.C. § 108(a)(1) (IRS Form 982). However, the debtor must reduce, in the following order, the following tax attributes in an amount equal to the excluded income: (1) net operating losses, (2) credit carryforwards, (3) capital loss carryforwards, (4) basis. 26 U.S.C. § 108(b). And a later sale of property securing a discharged debt will generate income in the amount of the sale price minus the tax basis. See Crane v. Commissioner, 331 U.S. 1, 91 L.Ed. 1301 (1947) (transfer of asset securing non-recourse debt is treated is a taxable event) & IRS Reg. § 1.1001.
Practice pointers
Disputing Accuracy of 1099-C. The taxpayer(tp) or counsel can protest the accuracy with the creditor. If the creditor wont willingly change the 1099-C, the tp or counsel can dispute the accuracy under IRC Sec. 6201(d) with the Internal Revenue Service (IRS). There are United State tax court cases on the website (www:ustaxcourt.gov/) which discuss these types of cases. For example Linkugel v. Comm’r, T.C. Sum. Op., 2009-180
External links
Issues in Cancellation of Debt Cases, http://meetings.abanet.org/meeting/tax/MAY13/media/bw_108_wright_paper.pdf