Discussion:Forgiveness of Debt / Gift Tax Issue
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Discussion Forum Index --> Tax Questions --> Forgiveness of Debt / Gift Tax Issue
| 12 May 2008 | |
| Father loaned Son $400,000 to buy shares from Father in a C corp business.
Promissory note was from Son payable to the Father over 10 years, interest only, with interest due annually. Note was secured by the C corp stock. Son paid Father interest annually as well as a $10,000 principal reduction over the course of several years. Several years into the arrangement, the C corp encountered financial difficulties and the stock became worthless. The son has $20,000 in cash on hand. He also has some unrelated, closely held assets that could be valued from $1,300,000 to as little as $200,000. Further, he has outside debts of $300,000 in addition to the $400,000 note to Father. Questions: 1) If Father cancels the entire debt, is it forgiveness of debt income? Can Father do this unilaterally or can it only be cancelled to the extent that interest and then the princopal become due? 2) If Father cancels the debt, is it a Gift to the Son? 3) If the answer to Question 1 is that it is forgiveness of debt income, can the Son claim to be insolvent? Does he have to file BK to be insolvent? Thank you for any input! | |
RoyDaleOne (talk|edits) said: | 12 May 2008 |
| I am sorry these questions are to complex for a simple answer that can be posted here. | |
| 13 May 2008 | |
| You do not need to file BK in order to be insolvent. This is a nice homework question. What school do you go to? | |
| 13 May 2008 | |
| Thanks for the responses. It's not a hypothetical/academic question. Any help would be appreciated. | |
| 13 May 2008 | |
| Need more info. Was the promissory note a purchase-money obligation? | |
| 13 May 2008 | |
| Riley2-- I think that it was a "purchase-money obligation" in the sense that the note was made in payment for the stock. In other words, the Father provided the stock to the Son in exchange for the Son signing the promissory note. No money really exchanged hands. | |
| 13 May 2008 | |
| If purchase-money debt of a solvent taxpayer is reduced, the COD income can be used to reduce the basis of the stock. However, this basis reduction would not be available if the true nature of the cancellation is a gift. | |
