The recently enacted American Recovery and Reinvestment Tax Act
contains new rules for cancellation of indebtedness
("COD") income, which could be of major importance for
you.
In general, the cancellation or reduction of the principal
amount of indebtedness gives rise to immediate, ordinary COD
income, unless the debtor is in bankruptcy, or is insolvent and not
rendered solvent by the cancellation. This rule creates a tax
hardship for debtors who are hurting economically and who are
attempting to work out or restructure their debts in order to avoid
insolvency proceedings.
To mitigate the harshness of this rule, the Act provides that
companies (or related persons) which reacquire debt instruments
issued in connection with the conduct of a trade or business can
elect to report the resulting COD income ratably over five taxable
years, beginning with the 2014 taxable year—a significant
deferral. This election, however, is available only for
indebtedness which is
