The IRS has concluded in a technical advice memorandum (TAM
2013-21-019) that a debtor incurred income from the discharge of
indebtedness (COD income) when a court order terminated the
creditor's rights to seek any amounts related to the debt.
The taxpayer addressed by the TAM was an S corporation that owed
debt to an unrelated third-party lender. Upon the debtor's
default, the creditor filed a claim in court asserting its right to
recover the amounts related to the debt. After the claim, the
debtor and the creditor agreed to settle the debt for less than the
full amount. The debtor then made a payment pursuant to the
settlement canceling the debt, and the court granted a motion to
dismiss the claim. However, the terms of the settlement provided
that the settlement would be null and void upon certain contingent
events occurring on or before a specified "effective
date" (for example, the debtor's bankruptcy and the
payment's being held as a fraudulent conveyance under
