Jamie went to the bank in order to negotiate a reduction to her loan balance for

Question

Jamie went to the bank in order to negotiate a reduction to her loan balance for her rental property. Total inital loan balance was $140,000, in exchange for a cash payment of $25,000, the bank would release title and forgive the balance of the loan. A month later the court approved chapter 11 bankruptcy discharging the unpaid balance of the loan while Jamie continued to retain title.  

FMV=$150,000

Basis=$81,000

What is the COD income realized from the discharge of debt? Is any of the COD income includible in Josephs taxable income?

Explanation / Answer

COD income realised from discharge of debt is $125,000 (i.e., FMV - Cash payment ; 150,000 - 25,000= 125,000)

Yes, COD income is includible in Joseph's taxable income considering the fact that Joseph retains the property's title.

As per the Tax court's decision in Jonathan Landow's case where, Landow took out a 90% loan against securities he put up as collateral. The loan was non-recourse---meaning that Landow could not be sued personally if he defaulted. Yet the securities were pledged as collateral. In fact, the lender had the ability to sell off the securities in ways that were unusual for garden-variety loans. And that’s just what the lender did, despite the fact that Landow later claimed he had no idea his securities would be sold.Landow didn’t pay off any of the $13.5 million principal amount of the loan and didn’t report the “loan proceeds” as income. The IRS claimed the loan transaction really wasn’t a loan at all and instead was a sale. The Tax Court agreed with the IRS, treating this putative loan deal as a highly orchestrated transaction in which everyone knew the transaction would be documented as a loan but really amounted to a sale.

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