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Discussion Forum Index --> Tax Questions --> FORGIVENESS OF DEBT INSOLVENCY EXCEPTION

RON CARMARK (talk|edits) said:

20 September 2006
Under IRC Code Section 108, is insolvency regarding Forgiveness of debt for a general partnership or "S" corporation determined at the entity level or at the individual shareholder or partner level.

In other words, if a partnership or "S" corporation has forgiveness of debt income, but the entity is insolvent, but not the individual shareholder or partner would the insolvency exemption work.

Thanks, Ron

Mtmckeecpa (talk|edits) said:

21 September 2006

For S corporations, the relief provisions of IRC Sec. 108 apply at the corporate level [IRC Sec. 108(d)(7)].

I am not sure about partnerships, I may have read it is determined at the partner level...not sure though.

Riley2 (talk|edits) said:

21 September 2006
Applied at the partner level for partnerships and applied at the corporate level for S corporations.

San Diego (talk|edits) said:

5 January 2007
How did you disclose this on the 1120S?

Mtmckeecpa (talk|edits) said:

5 January 2007

According to my PPC reference, form 982 must be filed and signed by an officer of the s corp if there is debt discharge income excluded from gross income.

615cpa (talk|edits) said:

16 November 2007
This was extremely helpful. Thanks!

Cgoodin (talk|edits) said:

14 December 2011
In reading this discussion - the form 829 must be attached to the Form 1120 or personal of the shareholder and if the corp and the shareholder is insolvent? - do the insolvency test and if both are insolvent the debt forgeiveness is not taxable? How about in a company where there is no debt foregiveness and the compnay closes - take it to equity and then the final K-1 shows a loss? I was reading an article on a case with Glitz vs the Commissioner where it takes the discharge of debt and this flows thruogh to the shareholder as tax exempt income and increase the basis which results in a potential loss upon liquidation or sale. Is that plus the Form 829 the way to handle this? Does the exempt income on the shareholders return raise an eyebrow?

DAJCPA (talk|edits) said:

14 December 2011
You mean Form 982??

If corp insolvent, but shareholder solvent, the corp can still exclude the income under the insolvency exception.

108(e)(6) addresses conversion of debt to capital.

I believe in response to Glitz, 108(d)(7)(A) was put in place to prevent the excluded income from increasing basis. Further losses suspended due to lack of basis are treated as an NOL (108(d)(7)(B)) and are subject to attribute reduction.

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