In today’s economic climate, an increasing number of taxpayers are struggling to repay loans, and seek concessions from their lenders. These concessions often involve a reduction in the principal balance of a debt, which typically generates taxable income from the discharge of indebtedness (“COD income”). With the aid of ameliorating tax code provisions, taxpayers have been able to avoid the recognition of COD income in certain cases. Now, thanks to a new Internal Revenue Code provision added by Congress, taxpayers can elect to defer certain COD income.
Internal Revenue Code Section 108(i), added by Congress earlier this year, provides welcome relief for many taxpayers, allowing the deferral of COD income generated in 2009 or 2010 in connection with certain debt transactions. For a taxpayer who takes advantage of this provision, COD income will not be included in gross income until 2014, and even then, included only ratably over a five-year period. Revenue Procedure 2009-37, issued by Treasury this past August, contains helpful guidance, clarifying some issues left open by section 108(i), and providing the election procedures.
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