Category: Deductions & Credits; Miscellaneous
Subject: Cancellation of Debt
Title: Forgiveness of Accrued but Unpaid Interest by a Cash Basis
IRC Sections: 108(e)(2)
Date Produced: 10/95
Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com
A bank has forgiven accrued but unpaid interest owed by a cash
basis taxpayer. Does cancellation of debt (COD) income result?
No COD income results provided the interest would have been deductible
if it had been paid.
IRC Section 108(e)(2) says COD income does not result from cancellation
of a debt related to an expense item if a deduction would be realized
if the expense item had been paid. This provision is consistent
with case law existing before its enactment. See Helvering v.
Jane Holding Co., 109 F.2d 933 (8th Cir. 1940), cert. denied,
310 U.S. 653 (1940); B.F. Avery & Sons, Inc. v. Comr., 26
B.T.A. 1393 (1932); Claridge Apartments Company v. Comr., 1 T.C.
163 (1942); 1180 East 63rd Street Building Corporation v. Comr.,
12 T.C. 437 (1949).
The statutory scheme of exclusion described above leaves some
unanswered questions for me, some of which may be relevant in
What happens if the expense item is not immediately deductible
-Suppose the taxpayer has elected or is required to capitalize
-Suppose the interest is treated as investment interest and
may or may not be deductible depending on whether the taxpayer
has investment income in the future.
There seems to be no guidance on such issues. I hope they are