2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

Required by the taxpayer if the original use of such property commences with the taxpayer jhgkgb,hbb “While seemingly a win for the taxpayer, the court agreed with the position espoused by the IRS. In this case, the taxpayer (as an S corporation) would utilize the insolvency exception to eliminate the income.”

Cancellation of Debt – Under IRC sec 108, debt cancellation generally causes ordinary income consequences to the debtor. However, several exceptions apply to recognition of taxable income, including i) where the debtor is discharged in bankruptcy and ii) where the debtor is insolvent, to the extent of such insolvency. • In Patacsil v. Commissioner, the Tax Court found there was taxable cancellation of debt (COD) income since the joint filers did not prove the value of their real estate and business. Their general opinion of value was not sufficient. • In Ahalwe v. Commissioner, the Tax Court said the insolvency exception did not apply where the only support provided by the taxpayer was a worksheet containing numbers, and there was no testimony nor documentation as to the method of valuing the assets. Additionally, there was no independent verification of liabilities shown as being due. Where the insolvency exception is to be used, a taxpayer must be able to demonstrate the accuracy of the value of assets and verification of liabilities.

In an interesting case, in Parker v. Commissioner, the Tax Court held that a reduction in nonrecourse debt by a lender to assist the sale of the property, which secured the debt, produced income that was part of the sales proceeds (potential capital gain income) and not ordinary income. In this case, the loan termination agreement included language that the loan cancellation was made “in connection with the proposed sale.” Additionally, the documents were executed on the same date as the other property transfer documents. While seemingly a win for the taxpayer, the court agreed with the position espoused by the IRS. In this case, the taxpayer (as an S corporation) would utilize the insolvency exception to eliminate the income. The Service benefitted from this result. However, the decision could ultimately benefit other taxpayers. S corporation – The Tax Court has questioned the use by the IRS of the “suspense account method” to deny the use of losses in a year open under the statute of limitations due to the use of losses in excess of stock and debt basis in a year closed by the statute of limitations. Regulations sec 1.101606(a) provides that “…

adjustments must always be made to eliminate double deductions or their equivalent.” Under S corporation rules, shareholders can use losses to the extent of the adjusted basis in stock and loans made by the shareholder to the corporation. Where a shareholder has taken losses in excess of available basis, the Service claims that it can effectively create a negative tax basis to be applied against future basis increases to determine the taxability of corporate distribution or use of future losses, even though IRC sec 1367(A)(2) says that basis cannot be negative. The Tax Court judge refused to grant summary judgment against the IRS (which had utilized this suspense account method to disallow allocated S corporation losses taken by the shareholder). However, the Service was asked to provide additional support for its position since the judge questioned whether there was a double deduction of losses where they occurred in separate tax years. It does not seem that this involves an attempt to deduct the same loss twice where they do not arise from the same economic event. We will need to track the developments in this case.

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