Cancellation of debt — taxability

[Penelope]

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?

[Twin Turbo Z]

Taxpayer insolvency may come into play. We had many taxpayers qualify for the exclusion. And with that amount possibly being owed, have the taxpayer fill out a liability vs asset form.

[Penelope]

Taxpayer not insolvent, but thanks for reply

Taxpayer insolvency may come into play. We had many taxpayers qualify for the exclusion. And with that amount possibly being owed, have the taxpayer fill out a liability vs asset form.

Thanks for the reply. This appears to be a new provision for taxpayers unlike mine. Glad that you can use it. From reading IRS publication 4681 and other sources, it appears that my taxpayer won't qualify for any exclusions. And hope seems to be fading that he will qualify for an exemption (As you probably know, there are both exemptions and exclusions to the general rule that cancelled debt should be included in taxable income.) Any new rules appear to me to accrue to forgiven debt involving property, but not on employment related loans, or similar loans.

[Rapid Robert]

This appears to be a new provision for taxpayers unlike mine. Glad that you can use it. From reading IRS publication 4681 and other sources, it appears that my taxpayer won't qualify for any exclusions. (As you probably know, there are both exemptions and exclusions to the general rule that cancelled debt should be included in taxable income.)

The Pub you reference uses the term "exceptions", not "exemptions".

The insolvency exclusion is not new.

What is "FA Loan Debt"?

[Penelope]

The Pub you reference uses the term "exceptions", not "exemptions".

The insolvency exclusion is not new.

What is "FA Loan Debt"?

Thanks for the correction: I believe you are right -- was going on the memory.

As for the "FA Loan Debt," I believe that FA stands for Financial Advisor; the taxpayer was paid for his "book" under a rather complicated employment agreement, where some of the payment (or earnings) was deferred and some was set up as a loan, to be forgiven when the employee left his employment. Box 6 was listed as "F" (for per Agreement) on the 1099-C.

We have decided that this forgiven loan is taxable. (The diagnosis of Parkinson's apparently doesn't change the agreement.) If anyone has more light to shed on this subject, I would be grateful.