Transfer of property to satisfy recourse debt results in both taxable gain and COD income

Article Abstract:

The Tax Court ruled in Gehl v. Commissioner that the insolvency exception under IRC section 108 only applied to IRC section 61(a)(12) cancellation of indebtedness income and not to gain recognized under IRC section 61(a)(3). The insolvent taxpayers exchanged farm land for debt relief and claimed that no cancellation of indebtedness income tax liability resulted because of their insolvency. The Court disagreed because the characterization of the gain as section 61(a)(3) gain made the insolvency exception inapplicable.

External debt relief, Debt relief

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Tax Court rules that nontaxable CODincome increases E & P and thus eliminates excess loss account

Article Abstract:

The Tax Court ruled in CSI Hydrostatic Testers, Inc. v. Commissioner that the taxpayer could benefit both from nonrecognition of cancellation of indebtedness income and elimination of the excess loss account because of the basis adjustment resulting from the debt cancellation. The IRS argued that this treatment created a double tax benefit to the taxpayer. The Court stated that the taxpayer's position was supported by regulations and case law and the IRS should revise the regulations if the result seems unjust.

United States, Affiliated corporations, Basis (Taxation)

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Ruling explains characterization of cancellation of indebtedness income under passive-activity rules

Article Abstract:

IRS regulations include interest tracing provisions which allocate interest expense under the passive-activity rules. These use debt principal for the allocation of the interest expense. Security for the loan does not affect that allocation. This procedure also applies to cancellation of indebtedness income and explains the result reached in Revenue Ruling 92-92.

Real estate, Real property, Passive activity (Taxation)

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