Academic journal article Journal of Accountancy

Debt Forgiveness Taxed

Academic journal article Journal of Accountancy

Debt Forgiveness Taxed

Article excerpt

Two exceptions to the general provision of IRC [section] 61(a)(12) recognizing income from the discharge of indebtedness were tested recently in separate cases, but the taxpayers were not successful in either.

Argued before the U.S. Bankruptcy Court for the Eastern District of Tennessee, Higgins v. Commissioner involved discharge of indebtedness income following foreclosure on real property in Georgia. Matthew Higgins and his wife, Mary Ann, borrowed approximately $100,000 from New Century Mortgage Corp. to purchase the property, and when they stopped making payments a few years later, the lender foreclosed. A foreclosure can result in income to the mortgagor if at the time of foreclosure the fair market value of the encumbered property is less than the outstanding debt. Accordingly, when New Century later sold the property for $93,739 less than the Higginses' debt prior to foreclosure, it reported income to them in that amount. On that basis, the IRS calculated a tax deficiency of $61,715 for 2005, for which it filed a claim in the couple's bankruptcy proceeding. The Higginses were unable to present credible evidence to dispute the amount of income. However, they argued that an exception under section 108(a)(1)(B), for insolvency of a taxpayer, applied to them. Although the court was certain that the Higginses were insolvent at the time of foreclosure, they presented no evidence to show the extent of their insolvency. …

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