Taxpayers in the United States may have tax consequences when the debt is canceled. This is commonly known as Earnings COD (Debt Cancellation) . According to the Internal Revenue Code, the release of the debt should be included in the gross income of the taxpayer. But there are exceptions to this rule, so a careful examination of one's COD earnings is essential to determine the potential tax consequences.
Billions of dollars of canceled debts will generate a lot of unexpected tax bills, due to the cancellation of debt that financial institutions begin to accelerate in 2012.
Video Cancellation of Debt (COD) Income
The policy reason behind COD revenue
Accession of wealth
The standard definition of income is found in the case of the United States Supreme Court entitled Commissioner v. Glenshaw Glass Co. The court defines income as 1) accession of wealth; 2) are clearly realized; and 3) where taxpayers have full power.
Prior to this decision, the Court has ruled that the cancellation of debt is "asset exemption." Basically, when the debt is canceled, the money to be used to pay the debt is now free to use on anything else the taxpayer wants. This is also known as "accession of wealth." Therefore, under Glenshaw Glass , it seems natural to include COD revenue in gross revenue.
Symmetry
The loan itself is not a gross income for the borrower, or a tax deduction to the creditor. This is because there is a "symmetry" of assets and liabilities on both sides: the borrower's wealth increases when the loan is taken offset by the obligation to repay the same amount. Likewise, the loss of the lender's wealth by lending the money is offset by the borrower's promise to pay back the entire amount. Ignoring interest, both parties will be in the same position when the loan is repaid as before the loan was made.
When the debt is canceled, the symmetry is destroyed. The borrower is now in a better position than if the loan was fully repaid. Taxpayers now have a greater ability to pay taxes and this is indicated by entering the amount of the canceled debts in the gross income.
Maps Cancellation of Debt (COD) Income
IRS Form 1099-C and reporting requirements
Who should file the IRS Form 1099-C
Generally, creditors who cancel a debt of $ 600.00 or more are required to file Form 1099-C on January 31 of the year following the date on which the debt is canceled.
The creditor may be the borrowing institution, the subsequent letter holder, guardian to the dual owner of a single note or government unit, but also includes individuals and business organizations of all kinds.
Failure to file Form 1099-C may subject taxpayers to civil penalties, but the penalties are relatively small, and rarely exceed $ 150.00 per form. There is no exclusion from the filing requirement if the canceled debt exceeds $ 600.00 is recognized.
When someone has to file an IRS Form 1099-C
Generally, the IRS Form 1099-C must be filed together with the Reporting Form 1096 at the end of January year after the date when the debt is canceled. However, if the date falls on the weekend, the filing date is postponed to the next business day.
Special circumstances
Shared Religion Document
Whether or not a debt cancellation can sometimes be ambiguous and controversial. In Commissioner v. Rail Joint Co. , a company issues its own bonds as dividends to its shareholders. When the bonds decrease in value, the Rel Joint buy back them less than the nominal amount. Typically, a bond pension for less than the issue price will result in the debt being canceled taxable. However, in holding that there is no COD for Rail Joint, the court noted that, unlike in the normal corporate debt issuance for cash consideration, the issuance of these bonds as dividends does not increase the corporate capital and does not create burdened assets to be later exempted by cancellations.
The IRS officially disapproves of the Rail Joint doctrine, arguing that what actually happens in this situation is constructive dividends and purchases: The corporation constructively issues cash dividends to shareholders, who then donate the cash. return to the company in exchange for bonds; Therefore, the burdened asset is the contribution money contributed constructively. Shared Train is a good law, and has been extended to include other situations where taxpayers do not receive anything of value in exchange for debts, such as when a borrower who does not enjoy the benefits of a loan settles less than the nominal amount.
Nonrecourse debt
Whether debt guaranteed to be recourse or nonrecourse can have significant consequences if debt is settled in the confiscation of a secured property. Generally, while net profit or loss is the same regardless of the classification of debt (it will always be the difference between the burdened property base and the amount of debt), there is the potential for huge tax differences.
When property is burdened by nonrecourse debt seized, there is no cancellation of debt even if the loan amount exceeds the fair value of the property market. Case of Commissioner v. Tufts argues that in such situations, the amount realized is the amount of debt, and the fair market value of the property is irrelevant. That the difference between the adjusted base of the property and the amount of debt is a modest advantage over the COD has a positive side and a loss. On the one hand, the advantage is capital gains assuming that the foreclosed property is a capital asset, unlike the usual COD. On the other hand, COD is potentially excluded, such as by bankruptcy (see below).
If the same property has been burdened by the debt of the recourse, and, as above, the property is taken over with full satisfaction of the debt, you will get different results. Gains or losses will be determined by reference to the fair value of the property market, and the difference between fair market value and debt is COD. (This intuitively makes sense because with debt recourse, the cancellation of the debt balance, after it has been satisfied with the FMV level of the submitted property, really is the cessation of personal responsibility to pay that amount, unlike in situations where debt is not known). If the property has a lower value than its base, then in case of debt recourse you can get capital loss and COD regular income on the same transaction, netting to the same dollar figure as with nonrecourse debt but potentially much worse for the taxpayer: taxpayer will not only be burdened with ordinary capital gain rather than potentially, but may have more total revenue to report, offset only by capital losses that will be unusable (except at nominal rates in individual cases) if the taxpayer has no other capital transaction for the year this. Just in case a taxpayer can take advantage of one of the COD exceptions, such as bankruptcy, can this result be better?
Disputed Debt Doctrine
The Disputed Debt Doctrine (also known as the Competing Responsibility Doctrine), is another exception for including COD revenue in gross revenue. This doctrine can be found in the case of the Third Circuit Court of Appeal, Zarin v. Commissioner . In order for this exception to take effect, the amount of debt must be completely debated. This can happen if both parties really have a dispute with good faith on the amount owed. A written instrument containing the amount of debt may not meet this requirement. However, since the court ruled at Zarin , the Disputed Debt Doctrine may also apply if the debt can not be enforced legally.
Exceptions
Not all COD revenue should be included in gross revenue. There are some exceptions:
- If debt repayment occurs in case of Title 11 â € <â € <- that is, bankruptcy
- If the debt release occurs when the taxpayer goes bankrupt
- If the debt released is a qualified agricultural debt
- If the debt that is released is a real property debt of real property
- If the debt discharged is a student loan that has been terminated due to death or total permanent disability of the borrower. These special provisions are added in the Tax Cuts and Employment Act of 2017, and apply for disposals during the calendar year 2018 to 2025.
Additionally, this Code recognizes the Purchase Price Adjustment exception.
- Unacceptable student loans for employment for certain classes of employers are also excluded
Requirements
To qualify for this exception, the taxpayer's debt must be generated by both
- the debt in which the taxpayer is responsible; or
- the debt is subject to the taxpayer who owns the property
For example, if the lender can not legally enforce the debt, the taxpayer is not liable for the debt and therefore will have no tax consequences.
If any of the two conditions are met, then the taxpayer must indicate that they are included in one of the five exceptions to avoid the tax consequences on COD Income.
The Rationale behind COD Income Exclusion
Exceptions under Section 108 are justified under various grounds. First, it is difficult to collect taxes from taxpayers who can not afford. Bankruptcy and bankruptcy provisions are delinquent taxes to the time when taxpayers can afford to pay. Agricultural debt provisions, on the other hand, are political decisions to subsidize farmers by offering tax benefits. Dismissal of student loans for those who perform certain types of work is designed to maximize the benefits. Prior to the start of the withholding tax and the Jobs Act of 2017, there were several lobbying attempts to convert 108 (f) (1) to those who received a total and permanent disability ruling, because under the Ministry of Education rules, the borrower must submit a review period after three years where their income from employment can not exceed the poverty line.
Case Title 11 â € <â € <
The Title Case 11 is the one included in Title 11 of the United States Code (related to bankruptcy).
Bankruptcy
A taxpayer goes bankrupt when their total liabilities exceed the fair market value of the asset. For example, if the taxpayer has $ 100,000 in liabilities but only $ 50,000 in assets, they are considered bankrupt based on the Internal Revenue Code. Therefore, a $ 20,000 debt cancellation does not need to be reported as gross income. However, if a debt of $ 60,000 is canceled, the taxpayer will have $ 10,000 in gross revenue because their total obligations no longer exceed their total assets (canceling $ 60,000 in debt means the taxpayer now only has $ 40,000 in liabilities).
Criteria for the exclusion of insolvency are far more stringent than those used under bankruptcy law. Asset bases for insolvency insolvency include tax-reward retirement accounts, almost all types exempted by law from an asset base in bankruptcy. An asset base for the exception of insolvency also includes assets that serve as collateral for any debt brought by a taxpayer.
Eligible agricultural debts
A taxpayer has met the terms of agricultural debt if
- the debt occurs directly with respect to the trade of taxpayers or businesses in agriculture; and
- 50% or more of aggregate gross receipts from taxpayers for three tax years prior to disposal due to trade or agricultural business
However, such taxpayer must be a "qualified person" as defined in 26 U.S.C. Ã, § 49 (a) (1) (D) (iv)
There are also additional rules regarding the totals that can not be excluded, which can not exceed the number of tax attributes and business and investment assets.
Real-quality business property debt
The debt of a qualified real estate business is what debt
- occurs or is assumed by the taxpayer in respect of the real property used in the trade or business and is guaranteed by such property;
- either 1) occurred or assumed before 1 January 1993, or 2) issued or assumed to acquire, construct, reconstruct, or substantially increase the actual property; and
- the taxpayer chooses to apply this exclusion
However, this exclusion will only reduce the base of the depreciable real property of the taxpayer.
Buy price adjustment
Sometimes a price agreement will be reached between the buyer and the seller, but for some reason both agree to reduce the price in the future. A strict reading of the Internal Revenue Code says that the reduced amount is COD revenue, it does not fall under any of the four exceptions, and thus the gross income. To address this situation, Congress passed 26 U.S.C. Ã, § 108 (e) (5), also known as purchase price adjustment. If the price drop occurs after the parties have reached an agreement, the Code of Conduct treats the agreed new price as if it were the original price, meaning there will be no COD revenue to the buyer.
Tax Attribute Reduction
General
If COD revenues are excluded from gross income, the taxpayer's tax attributes should be deducted, made through IRS Form 982 (Redemption of Tax Attributes Due to Debt Release). The taxpayer's tax attribute is, and should be reduced in the following order:
- Loss of net operation (ZERO) - Every ZERO of the year subject to debit
- ZERO carryover - Any NOL carryover to the year subject to debit
- General business credit - Any carryover to or from the tax year of the exemption amount for the purpose of determining the allowable amount of credit under 26 U.S.C. Ã,§38 (related to general business credit)
- Minimum tax credit - Minimum tax credit amount available under 26 U.S.C. Ã, §53 (b) from the beginning of the tax year immediately after the taxable year of the debit
- Net capital loss - Any net capital loss from the year subject to debit
- Loss of lost capital - Any loss of capital lost in the taxable year of debit
- Basic deduction - The basis of the taxpayer properties
- Loss of passive activity and credit switchover - Any loss of activity or credit jammed under 26 U.S.C. Ã,§469 (b) of the year subject to debit
- Foreign tax credit - Any carryover to or from the taxable year of the debit for the purpose of determining the allowable credit amount under 26 U.S.C. Ã,§27
Tax attribute deductions are made after the determination of taxes imposed for the taxable year of the debit.
When reducing ZERO or capital loss carryover, the tax attribute deduction should be in the order of the taxable years that each carryover is made on.
When reducing general business credit or foreign tax credits, tax attribute deductions must be made to ensure carryovers are taken into account.
Reasons for Policies Behind the Redemption of Tax Attributes
In the case of issuing COD revenues from gross income, the policy prevents new tax burdens on bankrupt and bankrupt taxpayers, which may be in situations where they are financially in need of such benefits, and which are likely to be difficult or impossible to collect.
However, in case of reducing taxpayer tax attributes, this policy does not incur new tax burdens on taxpayers. This actually reduces the tax credit and carryforwards that will be used to offset future revenue earned.
If the taxpayer's tax attributes are not reduced, the taxpayer can intentionally create a large tax attribute by creating debt, canceling the debt, and unfairly reducing their future taxes without paying the debt. For example, a taxpayer can deliberately spend a lot of debt and business losses, creating a big ZERO. Then, after filing for bankruptcy to erase the debt, they can use NOL carryforward for up to twenty years or until it runs out.
Number of Tax Attribute Reductions
The decline in tax attributes is dollar-for-dollar with the amount of COD revenue excluded for: ZERO, capital losses, and base reductions. The deductions in the tax attributes are 33 / 3 penny-for-dollar of COD's excluded revenues for: general business credit, maximum tax credit , loss of passive activity and loan shift, and foreign tax credit.
Zero Special Treatment for Corporations S
The S corporation has no net operating loss (ZERO). In contrast, the concept of NOL is handled at the shareholder level. Each shareholder shall treat any loss or deduction that exceeds their stock and debt base as deferred (unauthorized) losses, which carry forward indefinitely until applied to future earnings passed by Corporation S.
So that the shareholders of S Corporation do not receive tax benefits when individuals or other forms of business will not, while reducing this year's ZERO tax attributes are replaced by current shareholder current losses, and Zero transition is replaced by shareholder deprivation. Tests for the exclusion of cancellation of debt revenues still occur at the S Corporation level.
Subsequently, on 9 March 2002, President Bush signed the Employment Creation and Employee Assistance Act of 2002. This action prohibits shareholders from an increased base for their share of the forfeiture of the forbidden company's debt, for debt relief after October 11, 2001 Hal this effectively overturned the decision of the US Supreme Court on January 9, 2001 to allow such an increase on a base in Gilitz v. Commissioner, 531 US 206 (2001).
Selection to First Reduce
A taxpayer may elect to apply the reduction of the first tax attribute to the depreciable base of the property of the taxpayer, not exceeding the aggregate of the adjusted base of the depreciable property held by the taxpayer at the beginning of the taxable year after the taxable year of release.
In Property Cases Separate Bankruptcy
If a separate bankruptcy kingdom is created, the trustee must reduce the tax attributes of bankruptcy inheritance property by canceled debts. The taxpayer then "inherits" the final tax attribute of the bankruptcy estate.
Note
Source of the article : Wikipedia
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