The February column1 began a discussion focusing on the key issues that an owner of a troubled property faces when restructuring or working out a mortgage secured by a property (hereinafter troubled loan) that does not generate sufficient cash to service the troubled loan or maintain the troubled property. This column continues the discussion on cancellation of indebtedness income (COD income) with a review of the bankruptcy and insolvency exceptions to the COD income rules in connection with a restructuring or workout of a troubled loan.
The Bankruptcy Exception
Income from the discharge of indebtedness of the taxpayer occurring in an adjudication in bankruptcy pursuant to Title 11 of the U.S. Code is excluded from gross income (the bankruptcy exception), but only if (1) the taxpayer is under the jurisdiction of the Bankruptcy Court, and (2) the discharge is granted by the Bankruptcy Court pursuant to a plan approved by that court. The bankruptcy exception applies irrespective of whether the taxpayer becomes solvent as a result of the debt discharge.2
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