1099C cancellation of debt

You say what his assets are, but not what his debts are. The code says cancellation of debt income does not need to be recognized if the taxpayer is insolvent at the time. Insolvency means either that he can't pay bills as they come due, or that his liabilities exceed assets.

Assuming he has no other debts, the approach that strikes me off the top of the head is a bit of bootstrapping. It would be to say that his tax on the cancelled debt exceeds his assets, resulting in his being insolvent.

I haven't researched this, and don't know if that would work. But it's worth looking into.

___ Stu

His debts were $32,000. His assets were $3,000. That seems quite insolvent to me.

Seth

I've never seen a definition of insolvency for tax purposes that says the inability to pay bills as they come in meets the test. I am only aware of liabilities must exceed assets.

Citation?

Cash flow is not a factor in the insolvency calculation for income tax COD purposes.

Thanks for the clarification, Mark.

Under §108, "insolvent" means there is an excess of liabilities over the fair market value of assets. The cancellation of debt only avoids recognition to the extent that liabilities exceed assets. For example if someone is net insolvent by $100,000 but he has cancellation of debt of $150,000, he has to recognize $50,000 of income.

The test of insolvency is based on assets and debts immediately before the discharge. ___ Stu

And so, if there are multiple dates at which the credit cards debts were canceled, you need to calculate the net insolvency just before each one. It also helps to check how the results compare if each taxpayer in a couple figures the insolvency separately, or jointly.

Great information. Thanks.

___ Stu

Yes, immediately before means the day before. Which means the debt being canceled is included in the taxpayer's liabilities!