RRA '93 added qualified real property business indebtedness to the list of exclusions from gross income for discharge of indebtedness
. This exclusion is available to all taxpayers except C corporations and is elective rather than mandatory.
108(a)(1)(B), which provides that "gross income does not include any amount which would be includable in gross income by reason of the discharge of indebtedness
of the taxpayer if the discharge occurs when the taxpayer is insolvent," was modified by The Bankruptcy Act of 1980.
108(e)(6) provides that, for purposes of determining the debtor's income from discharge of indebtedness
, if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital, that corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder's adjusted basis in the indebtedness.
108(d)(3), insolvency is measured by determining the excess of liabilities over the fair market value (FMV) of assets immediately before the discharge of indebtedness
. The partner may include his or her partnership interests in determining personal insolvency.
Taxpayers must attach a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
(and Section 1082 Basis Adjustment), with their state tax return."
Taxpayers can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
, and attaching it to their federal income tax return for the year.
The value-added method is most often used to calculate reimbursement for the discharge of indebtedness
. A division exists in the appellate court over whether or not to include interest payments when calculating reimbursements for the discharge of indebtedness
Also, to the extent the debt is not reduced below the property's fair market value, it's possible to exclude the income on the discharge of indebtedness
and reduce the depreciable basis of the building--as long as the debt proceeds were invested in the property.
These compliance objectives include: gross income (cash and noncash transactions), discharge of indebtedness
, abusive tax avoidance transactions (ATAT), global compliance risks, amendments to the alternative minimum tax (AMT) and "flow-through" transactions of LLCs, LLPs and S corporations.
(21) This statute amends [section] 108(a) of the Internal Revenue Code (IRC) allowing taxpayers to exclude from gross income the discharge of indebtedness
on their principal residence.
Form 982--Reduction of Tax Attributes Due to Discharge of Indebtedness
(and Section 1082 Basis Adjustment)
Discharge of indebtedness
. When all or part of a debt is forgiven, the amount of the cancellation is ordinarily included in the income of the taxpayer receiving the benefit of the discharge.