Day _10 ACIS3314 Spring 2011 COD

Day_10 ACIS3314 - ACIS 3314 Tax Impact on Decisions Gross Income 2 Cancellation of Indebtedness 1 Tasks for Today Obligation to Repay Income from

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ACIS 3314, Day 10 1 1 Gross Income 2: Cancellation of Indebtedness ACIS 3314 Tax Impact on Decisions 2 Tasks for Today • Obligation to Repay • Income from Discharge of Indebtedness • Possible exclusions of Cancellation of Indebtedness (COD) Income 3 Gross income does NOT include amounts received under an obligation to repay. Examples : • Loan proceeds • Damage or security deposits received by a landlord from a tenant Obligation to Repay
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ACIS 3314, Day 10 2 4 Income from Discharge of Indebtedness: §108 In general, gross income includes “income from the discharge of indebtedness” [§61(a)(12)]. Debt may be discharged in two ways. 1. Property is transferred to the creditor to satisfy the taxpayer’s debt The taxpayer treats the transaction as if the property had been sold for an amount equal to the debt reduction. 2. Creditor cancels (forgives) the taxpayer’s debt The amount of income recognized by debtor is generally the amount of the debt forgiven. 5 Exceptions – Cancellation of debt (COD) income may be excluded from gross income in certain situations: Gifts . Gratuitous cancellations of debt may be excluded as gifts under §102, but this situation generally arises only among friends or family members. Forgiveness of Corporate Debt by Shareholders . Treatment depends on whether the shareholder is acting as a creditor or as a shareholder. Section 108 applies . One or more of the specific exceptions provided in §108 enables the taxpayer to exclude the COD income. Income from Discharge of Indebtedness: §108 6 • If the shareholder is acting as a shareholder , then the COD is a contribution to capital, but is not automatically excluded from income under §118. • Instead, §108(e)(6)(B) treats the corporation “as having
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This note was uploaded on 08/22/2011 for the course ACIS 3314 taught by Professor Hicks during the Spring '09 term at Virginia Tech.

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Day_10 ACIS3314 - ACIS 3314 Tax Impact on Decisions Gross Income 2 Cancellation of Indebtedness 1 Tasks for Today Obligation to Repay Income from

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