Last year, in an attempt to provide relief to the growing number of taxpayers struggling to repay loans, Congress enacted Internal Revenue Code §108(i). Section 108(i) allows the deferral of cancellation of indebtedness (COD) income generated in 2009 or 2010 in connection with certain debt transactions. Treasury’s subsequent release of Revenue Procedure 2009-37 clarified the statute’s application but left many crucial terms undefined, leaving many taxpayers, particularly partnerships, uncertain whether they would be eligible for deferral. Fortunately, temporary and proposed regulations issued under §108(i) this past August reign in the statute’s overly broad drafting, and provide much needed clarity to partnership borrowers.
Background
If a lender cancels all or a portion of a borrower’s indebtedness, the borrower generally will have taxable income equal to the amount of the discharge. Section 108 provides various exceptions (e.g., bankruptcy, insolvency, deferral) to the general rule that COD income must be included in gross income in the year of the discharge. Under §108(i), a taxpayer can defer certain COD income generated in 2009 or 2010 until 2014, and then recognize such COD income ratably over the five-year period beginning in 2014.
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