Federal Tax, Tax

Cancellation of Debt May Result in Taxes Owed

Debt forgiveness may result in taxes owed. Under federal tax law, gross income generally includes cancellation of debt (COD) income when a lender forgives all or part of a debt. One taxpayer was the sole member of a limited liability company (LLC) that defaulted on a bank line of credit. The bank filed a Form 1099-C, COD, for $34,964 with the IRS and provided it to the LLC. But the taxpayer didn’t include the COD income on his tax return, stating the debt was the LLC’s, not his. The U.S. Tax Court found issues, including that the LLC hadn’t filed Form 8832 electing to be treated as a corporation. The taxpayer was held liable for the tax on the COD as ordinary income. (TC Memo 2023-107). Contact the Cg Team with questions. © 2023