Your State Income Tax return and CODI

The Commonwealth of Massachusetts complies with all of the federal rules on CODI, deemed sales, and bankruptcy dealing with CODI except the IRC §108(i) Reacquisition of Business Debt Deferral.

For purposes of the corporate excise and the personal income tax, a taxpayer that makes the federal election allowed by IRC § 108(i) is required to add back to gross income any CODI that is deferred under IRC § 108(i). In future years when the deferred CODI is recognized for federal purposes, the taxpayer is allowed to make a corresponding subtraction, since the recognition event will have already taken place for Massachusetts Read More

Tax Entities and CODI

CODI in Partnerships

Exclusion at partner level – The exclusions apply at the partner level, not at the partnership level. The insolvency of the partnership does not affect the pass-through of the CODI. Each partner may use whichever exclusions they qualify for on their individual returns.

Real Property Business Debt Exclusion – The determination of whether debt is qualified as real property business indebtedness is made at the partnership level. Then, the election to apply the provision is made on a partner-by-partner basis. Read More

Documentation

As with all things dealing with income taxes documentation is a must. Since you are dealing with personal, business, or investment use property, it is imperative that you have good documentation for all figures you use in your calculations. The exclusion of CODI and the lack of claiming a deemed sale taxable gain, on the proper forms, is one of the “high risk” audit items at the IRS.

When dealing with your business and investment items you need the same type of documentation that you would use to determine basis for disposition. If the item has been in service and has been depreciated, a copy of the current depreciation worksheets are a Read More

How to Apply the Exclusions

As mentioned above, if a client qualifies for one of the five exceptions you should apply that exception first. If there is still possible CODI after the exceptions are applied, then you should work your way through the exclusions in order until you reach the end of the exclusions or the end of the CODI, whichever comes first. We will work a comprehensive example at the end of the text that shows this theory at work.

All of the exclusions are documented on the Form 982 in one way or another. There is also an IRS provided insolvency worksheet for use in determining that exclusion. Some of the exclusions require you to reduce your Tax Attributes. We will define and discuss this Read More

Exceptions and Exclusions to CODI

There are five exceptions to CODI. An exception means that the debt is not included on the tax return on its own merits and does not need to meet any other exclusions or calculations. The exceptions are as follows:

1. Non-Recourse debt. As indicated in the earlier text and non-recourse debt is not the responsibility of the debtor over the amount of the collateral seized, unless the debtor does a “workout” with a different lender than the original creditor, than the CODI is included. But it may meet one of the exclusions later in the text.

2. Gifts. If the debt cancellation was intended as a gift from the creditor to the debtor there Read More

Chapter 13

A chapter 13 bankruptcy is often called a “wage earner’s” bankruptcy. It enables individuals with regular income to develop a plan to repay all or part of their debts over three to five years. During this time the law forbids creditors from starting or continuing collection efforts.

Advantages – A particular advantage of chapter 13 is that it provides debtors with an opportunity to save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan.

Effect on collections – Individuals may use a chapter 13 proceeding to save their home Read More

Alternatives to Foreclosure

Foreclosures are usually a last resort for both the lender and for the debtor. There are many alternatives to foreclosure, some still require the debtor to give up the property but most allow the debtor to keep possession of their property and make alternate payment arrangements.

Mortgage Modifications: This is normally a type of refinance under better terms then the current mortgage. It will lower the interest rate and extend the life of the loan. This results in a smaller monthly payment. The debtor keeps the home.

Forbearance: This is the lender allowing the debtor to miss one or a series of payments Read More

Tax Consequences of Foreclosure

When a foreclosure or repossession is made there are tax consequences in addition to the legal and monetary issues. When a piece of collateral is seized in place of a debt, it is deemed a sale of the property and must be reported like any other sale, as we discussed in the previous section.

For recourse loans, the amount of the realized gain is:

• the lesser of the debt immediately before the seizure reduced by any amount of the loan the debtor remains liable for after the seizure
or Read More

Procedural Flow of Foreclosure

The debtor has several options when faced with a foreclosure or repossession. The options have varying costs, time limits and consequences associated with them. Be aware that every state has differing rules and procedures for these actions and failure to abide by the rules in that jurisdiction can results in the loss of time, money and rights for both the lender and the debtor.

The debtor may voluntarily surrender a piece of collateral property to the creditor when the threat of foreclosure or repossession is imminent.

For Example: John purchased a new car in Jan 2013. By November 2013 John had lost Read More

Deemed Sales

As we mentioned earlier, any time a property is seized or abandoned the owner has a “deemed sale” of that piece of property. As with any tangible asset, if there is a sale, there is a gain or loss. Whether or not that gain or loss is reportable and the manner in which it is reported will depend on the type and use of the property.

This is treated completely separately from the calculation of CODI and may occur in a separate tax year if the foreclosure takes an extended period of time. Unless both the seizure of the property and the cancellation of debt occur in the same tax year the debtor should receive a Form 1099A when title to the property is transferred to the lender who Read More