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debtor because the assets are no longer encumbered. A
cancellation of indebtedness generally produces income to the
debtor in an amount equal to the difference between the amount
due on the obligation and the amount paid for the discharge. If
no consideration is paid for the discharge, then the entire
amount of the debt is considered the amount of income which the
debtor must include in income. Sec. 61(a)(12).
Section 108(a)(1) provides an exclusion for COD income if
(A) the discharge occurs in a title 11 case, (B) the discharge
occurs when the taxpayer is insolvent, or (C) the indebtedness
discharged is qualified farm indebtedness.7 Section 108(d)(2)
defines the term "title 11 case" as "a case under title 11 of the
United States Code (relating to bankruptcy), but only if the
taxpayer is under the jurisdiction of the court in such case and
the discharge is granted by the court or is pursuant to a plan
approved by the court."
7Sec. 108(a) reads in part:
SEC. 108(a). Exclusion From Gross Income--
(1) In general.--Gross income does not include any
amount which (but for this subsection) would be includible
in gross income by reason of the discharge (in whole or in
part) of indebtedness of the taxpayer if--
(A) the discharge occurs in a title 11 case, or
(B) the discharge occurs when the taxpayer is
insolvent, or
(C) the indebtedness discharge is qualified
farm indebtedness.
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Last modified: May 25, 2011