Taxing Lessons Case Summaries

Case — Recognition of Cancellation of Indebtedness Income

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TL Case Summ


When is cancellation of indebtedness income recognized?


Taxpayer Says: The debt should have been discharged and recognized in an earlier year.

Internal Revenue Service Says: The debt forgiveness was reported on Form 1099 for 2006 and is subject to tax in that year.


From Internal Revenue Code Section 61(a)(12): In general, the term “income” as used in the Internal Revenue Code means income from any source, including income for the discharge of indebtedness. [Editorial note: This case involves the 2006 tax year, prior to the Mortgage Debt Relief Act of 2007, which generally allows you to exclude from income the discharge of debt on your principal residence.]

From Federal Tax Regulation 1.6050P-1(b)(2)(i), (iv): Provides an exclusive list of eight “identifiable events” under which debt is discharged for information reporting purposes, including a discharge pursuant to a foreclosure, the application of a defined policy of the creditor to discontinue collection activity and discharge the debt, or the expiration of a nonpayment testing period (usually 36 months).

From Cozzi v. Commissioner, 88 T.C. 435, 445 (1987): The moment it becomes clear that a debt will never be repaid, that debt must be viewed as having been discharged. Any identifiable event that fixes the loss with certainty may be taken into consideration.

From Owens v. Commissioner, T.C. Memo. 2002-253, affd. in part, revd. in part and remanded 67 Fed. Appx. 253 (5th Cir. 2003): The issuance of a Form 1099-C is an identifiable event, but it is not dispositive of an intent to cancel indebtedness.


Unless you qualify for an exception such as insolvency, when someone to whom you owe money cancels or forgives your debt, you have taxable income that you report on your tax return in the year the debt was forgiven.

Generally the lender must report the forgiveness to you on Form 1099-C, Cancellation of Debt, in the year following the calendar year in which an “identifiable event” occurs. Eight identifiable events are listed in tax regulations (see excerpt from Regulation 1.6050P above).

In this case, the taxpayer abandoned his home in 1993, and it was sold in foreclosure in 1994. In 1995, the bank obtained a deficiency judgment against the taxpayer and wrote the loan off its books. The bank continued to attempt collection through 2001, when those efforts ceased. In 2006, the bank issued Form 1099-C, Cancellation of Debt.

The taxpayer, who was insolvent at the time of the foreclosure, never received the Form 1099-C and had no knowledge of the cancellation of the debt until he received an IRS notice in 2008. When he contacted the bank, he received a letter stating the account had been reviewed and the Form 1099-C was correct.

The taxpayer believes the foreclosure in 1994 was the identifiable event leading to the reporting of income from the discharge of indebtedness and that the Form 1099-C should have been issued in 1995, when the bank wrote off the loan.

The Internal Revenue Service says the discharge of indebtedness occurred in 2006 and not when the loan was “charged off” in 1995 or when collection activities ceased in 2001. As proof, the IRS provided a letter from the bank which stated the account had been reviewed and that both Form 1099-C and the amount of the discharge of indebtedness income were correct.


Make your selection, then see “The Court’s Decision” below for a full explanation

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.


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For the Taxpayer. The evidence the IRS provided failed to indicate an identifiable event, a bank policy, or a State law that would justify the discharge of indebtedness in 2006. We find the taxpayer has satisfied his burden of proving the discharge occurred before 2006. Therefore, we hold that taxpayer did not have income from the discharge of indebtedness in 2006.