Cancellation of debt (COD) is settlement of a debt for less than the amount owed. A debt may be cancelled by a lender voluntarily or through bankruptcy or other legal proceedings and may result in ordinary income, income from the sale of assets, or both. * Gift tax may apply. Form 1099-C, Cancellation of Debt
How is cancellation of debt treated by a debtor Corporation?
If a principal shareholder’s cancellation of debt owed to the shareholder by the corporation was forgiven in order to improve the corporation’s financial position, the debtor corporation is treated by Sec. 108 (e) (6) as having satisfied the debt with cash equal to the shareholder’s adjusted basis in the debt.
What is cancellation of debt income (Cod) in an S corporation?
But the rules adopted for distribution of Cancellation of Debt Income (COD) in an S corporation is different from that of a partnership. As mentioned earlier, the income of a shareholder does not increase with the cancellation of indebtedness.
What happens to Cod when a company is declared insolvent?
In either insolvency or bankruptcy, the amount of COD income excluded will result in a reduction of the company’s tax attributes by the exclusion amount. Once the excluded COD has been determined, the amount excluded shall be applied to reduce the tax attributes of the company in the following order (Sec. 108 (b)): 1.