Discharge of Indebtedness Income: Grantor Trusts And Disregarded Entities

by Bruce Givner on January 10, 2012

Major Tax Problems News Update:

The Internal Revenue Service has issued Proposed Regulations §1.108-9 that provides that grantor trusts (trust which are ignored for income tax purposes) and disregarded entities, e.g., single member LLCs, will not be considered the “taxpayer” for purposes of §108. As a result, the exceptions to cancellation of debt income for bankruptcy and insolvency are only available to the extent that the owner of the grantor trust or the disregarded entity is itself bankrupt or insolvent.

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For partnerships, the rules apply to the partners to whom the cancellation of debt income is allocable. If the partnership holds an interest in a grantor trust or disregarded entity, the exceptions are applied by looking through the partnership to the partners to whom the income is allocable.

Cancellation of debt income is complex. For example, there is a specific exception to the recognition of cancellation of debt income for “qualified principal residence indebtedness,” extremely important in this time of upside down mortgages. Contact us for help with these Major Tax Problems. www.GivnerKaye.com (310) 207-8008

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