Chapter 8 v2– Discharge of Indebtedness

Chapter 8 v2– Discharge of Indebtedness -...

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Chapter 8 – Discharge of Indebtedness Why did I choose this section to include in your study? It has current relevance.
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Debt Discharge §108 is the governing section, along with §61(a)(12). General rule: income from the discharge of debt is includible in gross income.
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Debt Discharge § 108. Income from discharge of indebtedness. (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, (B) the discharge occurs when the taxpayer is insolvent, (C) the indebtedness discharged is qualified farm indebtedness, or (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness. (2) Coordination of exclusions. (A) Title 11 exclusion takes precedence. Subparagraphs (B), (C), and (D) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case. (B) Insolvency exclusion takes precedence over qualified farm exclusion and qualified real property business exclusion. Subparagraphs (C) and (D) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent. (3) Insolvency exclusion limited to amount of insolvency. In the case of a discharge to which paragraph (1)(B) applies, the amount excluded under paragraph (1)(B) shall not exceed the amount by which the taxpayer is insolvent.
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New Rules for 2008 (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010. (h) Special rules relating to qualified principal residence indebtedness. (1) Basis reduction. The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer. (2) Qualified principal residence indebtedness. For purposes of this section, the term "qualified principal residence indebtedness" means acquisition indebtedness (within the meaning of section 163(h)(3)(B) [ IRC Sec. 163(h)(3)(B) ], applied by substituting "$ 2,000,000 ($ 1,000,000" for "$ 1,000,000 ($ 500,000" in clause (ii) thereof) with respect to the principal residence of the taxpayer. (3) Exception for certain discharges not related to taxpayer's financial condition. Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.
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This note was uploaded on 09/27/2008 for the course BUS 1000 taught by Professor Professor during the Spring '08 term at Cal Poly.

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Chapter 8 v2– Discharge of Indebtedness -...

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