Category: Deductions & Credits; Miscellaneous
Subject: Cancellation of Debt
Title: Forgiveness of Accrued but Unpaid Interest by a Cash Basis
Taxpayer
IRC Sections: 108(e)(2)
Filename: 1277.html
Date Produced: 10/95 Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com Issue
A bank has forgiven accrued but unpaid interest owed by a cash
basis taxpayer. Does cancellation of debt (COD) income result? Answer
No COD income results provided the interest would have been deductible
if it had been paid. Discussion
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
this matter. What happens if the expense item is not immediately deductible
when paid? -Suppose the taxpayer has elected or is required to capitalize
the interest? -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
irrelevant. | 
