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Thread: Cancellation of debt taxability

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  1. #1
    Join Date
    Mar 2006

    Default Cancellation of debt taxability

    Taxpayer has significant cancellation of debt. If it is taxable, taxpayer owes $14,000; if it is non-taxable taxpayer gets a refund of $14,000!!! Any insights about the taxability of this cancellation would be much appreciated.

    Background: If taxpayer was personally liable for the debt, it would normally be taxable UNLESS (and this is the important part) there is an exemption. Most exemptions (which were apparently passed retroactively in 2018) are for property. But my taxpayer's cancellation was part of an agreement he signed when he started working for a new employer.

    The 1099-C from Wells Fargo bank includes these points: The taxpayer was personally liable for repayment of the debt. Debt discharged was around $100,000. The debt description: "Cancellation of FA Loan Debt." The field called "Identifiable Event Code" (Box 6) = F, for "By agreement. Per IRS pub 4681, "Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration." Another factoid: This taxpayer severed employment, because of disability (he had/has Parkinson's.)

    Bottom line: What questions should I ask the taxpayer about this agreement, so as to determine whether or not it is taxable?
    Last edited by Penelope; 04-11-2018 at 07:57 AM.

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