A Primer on Debt Cancellation Income Tax for Non-Tax Lawyers
The following is an excerpt from the article:
With every business cycle there is an inevitable decline. For lawyers such decline means advising on bankruptcy, workouts, and restructurings, One of the most important tax issues that arises in this context is cancellation of the debt (COD) income. This article provides a primer on COD income for the non-tax lawyer, which results from debt forgiveness in real estate workouts. As a primer, various important but hypertechnical issues are ignored in order to provide a more helpful picture of the issues. Be aware that some tax practitioners and commentators may use a variety of terms to refer to COD income, such as “discharge of debt income” or “discharge of indebtedness income.”
This article first addresses the threshold question of whether COD income has been triggered. It begins by examining how to measure that income and is followed by a discussion of reporting requirements. Various exclusions and deferrals that may be available to debtors are taken up next, and the article concludes with a discussion of various issues that arise on the creditor side.