| A discharge of a personal recourse debt (such as a credit card or mortgage) is a taxable event and constitutes income. Think of it this way: You had this debt, but the creditor wrote it off and now you don't have to pay. That puts you in the same situation as if you won a lottery and used the money to pay the debt. You'd pay taxes on the lottery, so you pay taxes on the discharge of debt.
HOWEVER, there is a BIG exception to this rule. If you are insolvent when the company discharges your debt, you do not have to claim it as income. Insolvent uses the bankruptcy definitions - your liabilities exceed your assets and/or your expenses exceed your income. Refer to section 108 of the IRC, below. If they send you a 1099C, you probably don't have to include it in income. Just send in a statement with your tax return that you are able to exclude the discharge from income because you were insolvent when the debt was discharged and cite sec. 108(a) of the IRC.
Sec. 108. - Income from discharge of indebtedness
(a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if -
(A) the discharge occurs in a title 11 case [bankruptcy],
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness, or
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness.
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This post does not constitute legal advice, nor does it create an attorney-client relationship. Postings are based only on the information provided and you should consult an attorney in your area before relying on information contained in this post.
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08-19-2002, 10:53 PM
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