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Tax treatment of discharged liabilities

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Baraka

Guest
I have two questions regarding discharged liabilities. I'm assuming that all parties are corporate entities.

1. It is my understanding that borrowers who dispose of property in exchange for a discharge of liabilities secured by that property are treated as having realized income equal to the fair market value of the property at the time of disposition plus the amount of liabilites from which they are discharged (forgiven). Effectively, the borrower is treated as having sold the property for the face value of the liabilities even if the face value is greater than fair market value at the time of disposition. Does that mean the lender's basis in the property is equal to the face value of the liabilities they discharged or is the basis the fair market value of the property at the time of acquisition?

2. The interest on OID debt is usually treated as the face value of the debt minus the original issue price. Generally the borrower faces a tax deduction on the interest while the lender faces a tax liability. If the borrower ultimately repays less than the original issue price, is the borrower treated as having realized income (tax liability) and the lender treated as having realized a loss (tax deduction)? The parallel example that comes to mind is a share repurchase where a firm repurchases its shares from an investor at a lower price than the investor originally paid. The investor obviously has a capital loss. But it also seems that the firm's treasury has a gain that is taxable on the other side.


Feedback wanted.

 


A

Attorney_Replogle

Guest
Unfortunately I don't practice tax law so I can't help you out. I would suggest speaking with a tax attorney near you. You can find one at attorneypages

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Mark B. Replogle
 

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