View
227
Download
0
Category
Preview:
Citation preview
7/28/2019 Gross Income Tax
1/18
Chapter 3DLOANS AND
THE CANCELLATION OF DEBT
Federal Income Taxation of IndividualsSamuel A. Donaldson
Donald B. Tobin
7/28/2019 Gross Income Tax
2/18
Loans and the Cancellation of DebtNeither a borrower nor a
lender be,
For loan oft loseth bothitself and friend.And borrowing dulls the
edge of husbandry.Hamlet, Act I, Scene iii
7/28/2019 Gross Income Tax
3/18
$12,000,000
United States v. Kirby Lumber
$1,000,000
7/28/2019 Gross Income Tax
4/18
$12,000,000
Kirby Lumber
$1,000,000
Kirby now owes bondholders$12 million
7/28/2019 Gross Income Tax
5/18
$12,000,000
Kirby Lumber
$1,000,000
Kirby now purchasesone bond back
for $862,000.
$138,000 Taxable?
7/28/2019 Gross Income Tax
6/18
Why would bond go down in value?
Ex. Bond issued when Kirby had
good credit. FM interest
rate was 8%. So Kirby can issue
a $1 million bond that pays $80,000
a year.
1,000,000 * .08 = 80,000
@ 8%
7/28/2019 Gross Income Tax
7/18
$1,000,000 * .08 = 80,000
@ 8%8%
10%
$800,000 * .10 = 80,000
If interest rates go up to 10%, would
you buy a 1,000,000 bond that paid
you $80,000?
I hope not. You either want a
$1,000,000 bond paying you$100,000 or an $800,000 bond
paying you $80,000.*
@ 10%
In real bond pricing, you would also build into the price the face amount of the bond. For more accurate
bond pricing see thisbond price calculator.www.spreadsheetconverter.com/calculate/html/financial/Bond_Price_Calculator/Bond_Price_Calculator.htm
http://www.spreadsheetconverter.com/calculate/html/financial/Bond_Price_Calculator/Bond_Price_Calculator.htmhttp://www.spreadsheetconverter.com/calculate/html/financial/Bond_Price_Calculator/Bond_Price_Calculator.htm7/28/2019 Gross Income Tax
8/18
$1,000,000 * .08 = $80,000
@ 8%8%
10%
$800,000 * .10 = $80,000
Since the payout amount is
fixed at $80,000, only the
price of the bond can change.
The market rate for the bond,
thus becomes less than
its face value.
@ 10%
(The exact amount the bond will decrease is complicated because the face amount of the bond remains
constant. The price will reflect demand for the bond, which includes the interest rate of the bond and
the confidence buyers have in the issuers ability to repay the principal. This is a very simplified
summary of how bond prices react to changes in interest rates.)
7/28/2019 Gross Income Tax
9/18
$1,600,000 * .05 = $80,000
@ 5%
8%
5%
$1,000,000 * .08 = $80,000
The same thing would happen in
reverse if interest rates went down.
@ 8%
7/28/2019 Gross Income Tax
10/18
United States v. Kirby Lumber Co.
The cancellation of debt isgross income to theborrower.
FREEING OF ASSETS SYMMETRY
Loan proceeds not
included in gross income
upon receipt because of
obligation to repay.
Cancellation of obligation
to repay removes the
reason for excluding the
proceeds from income.
7/28/2019 Gross Income Tax
11/18
COD Income
INCLUDECOD income
[61(a)(12)]
EXCLUDE if
it occurs in
title 11 case
[108(a)(1)(A)]
EXCLUDE if
it occurs
when TPinsolvent
[108(a)(1)(B)]
EXCLUDE if
it is qualifiedfarm
indebtedness
[108(a)(1)(C)]
EXCLUDE if
it is qualified
real propertybusiness debt
[108(a)(1)(D)]
Must reduce
tax attributesas payment for
exclusion.
[108(b)(1)-(2)]
7/28/2019 Gross Income Tax
12/18
COD Income
INCLUDECOD income
[61(a)(12)]
EXCLUDE if
it occurs in
title 11 case
[108(a)(1)(A)]
EXCLUDE if
it occurs
when TPinsolvent
[108(a)(1)(B)]
EXCLUDE if
it is qualifiedfarm
indebtedness
[108(a)(1)(C)]
EXCLUDE if
it is qualified
real propertybusiness debt
[108(a)(1)(D)]
Must reduce
tax attributesas payment for
exclusion.
[108(b)(1)-(2)]
7/28/2019 Gross Income Tax
13/18
COD Income
INCLUDECOD income
[61(a)(12)]EXCLUDE if
it is qualified
real propertybusiness debt
[108(a)(1)(D)]
Must reducebasis aspayment forexclusion.
[108(c)(1)(A)]
108(c)(2)(A):
PRINCIPAL BALANCE
LESS BUSINESS REAL ESTATE EQUITY
MAXIMUM AMOUNT EXCLUDABLE
108(c)(2)(B):
Exclusion cannot exceed theaggregate bases of the taxpayers
depreciable real property held
immediately before discharge
7/28/2019 Gross Income Tax
14/18
Problem 3-16(b)
$50,000
$35,000
b) No income, insolvent 108(a)(1)(B)
Assets = ($40,000)
7/28/2019 Gross Income Tax
15/18
Problem 3-16(c)
$50,000
$35,000
c) $10,000 income
Assets Liabilities = ($5,000)
7/28/2019 Gross Income Tax
16/18
Problem 3-16(d)
$50,000property
$10,000 cash$40,000 debt
7/28/2019 Gross Income Tax
17/18
Hey! Thatpropertywas only
worth$42,000.
OK. Illreduce thenote from$40,000 to
$30,000
d) No gross income. Section 108(e)(5) provides that a reduction inprice shall be treated as a purchase price adjustment and not as thecancellation of debt.
7/28/2019 Gross Income Tax
18/18
Zar in v . Comm issioner
Recommended