Friday, November 30, 2012

Section 108 Discharge of Debt

Section 108(a) states debtors who are insolvent should indeed not be taxed on income from favorable discharge of debt. §108 excludes discharge of indebtedness from gross income under certain specified conditions, such as when the discharge occurs in bankruptcy or when the taxpayer is insolvent. Under ordinary taxation principles, discharge of debt would clearly fall within the broad definition of gross income provided by the IRC.

§ 108 thus provides a measure of relief for certain taxpayers who find themselves facing serious financial difficulties. Converts the exclusion into a deferral.

COD= Cancellation Of Debt, may have to against tax attribute. Tax Attribute = A tax benefit, when a taxpayer goes bankrupt, they will have lots of tools at their disposal. It may have to reduce them by cancellation of debt income that they got during the year of bankruptcy. Start with NOLs, they use that COD income to reduce the NOLs, then general business credits, offset these credits.

The taxpayer who takes of advantage of § 108 loses other valuable tax perks as a result, such as the ability to carry over into future years net operating loses and tax credits in the current year.    Exception, for qualified real property indebtedness.

§ 108(a)(1)(e) – Subsidy for Home Mortgage Debt. Taxpayers can exclude from COD if its qualified property indebtedness. If you have debt you use to construct or improve residence, the residence secures that debt. Residence must be used as the principal abode. Lots of specific tax benefits available as subsidies for certain kinds of debt.

§ 108(f)(1) - Exception to COD exclusion rule for certain student debt indebtedness.  Gross income does not include any cancellation of debt income because the individual worked for certain professions. Discharge of debt for certain things. Must have broad provision about working for certain organizations, if not, you have COD. No strict geographic limits either. This term is mushy.

1 comment:

albina N muro said...

tates debtors who are insolvent should indeed not be taxed on income from favorable discharge of debt. §108 excludes discharge of indebtedness from gross income under certain specified conditions. studio contabile milano

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