Cancellation of Debt Income Can Be a Surprise for the Borrower by ProQuest


Income from the cancellation of debt (COD) is a glowing problem for many American taxpayers because the volume of defaulted debt is increasing. The current economic downturn was triggered by an unprecedented number of subprime home mortgages that began to go into default in late 2007. As the asset bubble continues to deflate, debt defaults will spread to commercial real estate markets. The same faulty decision making that led taxpayers with good credit ratings to take on large amounts of debt in very risky adjustable rate mortgages also affected commercial borrowers. Actual income recognition is triggered by IRC section 61, which provides that gross income includes income from whatever source it is derived, including income from discharge of indebtedness. A taxpayer may qualify for more than one exclusion in a tax year. When that occurs, the exclusions must be coordinated. Title 11 bankruptcy exclusion takes precedence over all other IRC section 108 exclusions.

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