Cancellation of Indebtedness Income: Rules and Exclusions (Second Edition) (00111064, 2012)

Individuals and businesses routinely go into debt. At any time, but particularly in the midst of a troubled economy such as the recent recession, some will have problems paying off their debts. Their creditors may decide that the borrower is not going to pay the full amount of the debt. In that circumstance, a creditor may forgive or cancel part or all of the debt. The cancellation of indebtedness rules are complex. When determining whether there has been COI income, the debtor may have a difficult time trying to apply the numerous exclusions and meet the requirements to reduce attributes. This course discusses the impact on the borrower of a COI and examines a provision enacted in 2009 that defers COI income realized from the forgiveness of certain business debt.
Final Exam > Results Page
final exam score:
93%

Question 1
Correct
The 2009 Recovery Act allows COI income from reacquisition of business debt in 2009 to be deferred and recognized ratably over a five-year period starting in the year:

2013

(You Answered) (Correct Answer) 2014

2015

2016

Question 2
Correct
A discharge of debt arises from:

(You Answered) (Correct Answer) An identifiable event

A compromise to a dispute resulting in reduced payment

An agreement to cancel a debt contingent on future events\r

An agreement by a seller lender to reduce a buyer’s purchase money debt where the debt relief is a reduction/forgiveness in the price by the seller of the property to the borrower buyer

Question 3
Correct
When the seller of property finances the sale and secures the loan using the property, the debt is called:

Seller-reduced purchase price

Sales price discharged debt

(You Answered) (Correct Answer) Purchase money debt

Sales price reduced debt

Question 4
Correct
The first tax attribute reduced by subtracting the amount of COI income excluded from gross income due to farm indebtedness or disaster expenses is:

(You Answered) (Correct Answer) Net operating losses or NOL carryovers for the year of discharge

Passive activity loss or credit carryovers from the year of discharge

Foreign tax credit carryovers to or from the year of discharge

The minimum tax credit at the beginning of the year following the year of discharge

Question 5
Correct
If debt forgiven on business real property exceeds the debtor’s total adjusted basis in depreciable property:

The debtor may apply the exclusions to exclude the excess from gross income

(You Answered) (Correct Answer) The debtor must recognize COI income for the excess

The debtor must increase the basis of the real property securing the debt

The lender must recognize COI income for the excess

Question 6
Correct
Which of the following is not a requirement for taking the real property business debt exclusion?

Securing the debt using the real property

(You Answered) (Correct Answer) Operating as a C corporation

Satisfying criteria of qualified acquisition debt on the property

Limit the amount that can be excluded to the debt’s outstanding principal immediately before the discharge, reduced by the net fair market value of the real property

Question 7
Correct
The discharge of debt made as a gift or bequest:

Occurs when a creditor cancels debt believing that it will not be repaid

(You Answered) (Correct Answer) Is not taxable income

Creates COI income for both business and nonbusiness recipients

Occurs when a debt is contingent upon occurrence of a future event

Question 8
Correct
A corporation using its own stock to satisfy a debt is:

(You Answered) (Correct Answer) Treated as though the money paid equaled the stock’s fair market value

Taxed on the conversion if the preferred stock’s issue price is less than the value at payment

Allowed a deferral on recognizing COI income for three tax years

Taxed on the conversion if the adjusted issue price of the debt is less than the fair market value of the common stock

Question 9
Correct
The five-year deferral of COI income recognition allowed by Code Sec. 108(i) applies to:

Debt incurred for investment

(You Answered) (Correct Answer) Businesses repurchasing their own debt

Personal debt, including student loans

COI income realized in 2005 or 2006 from the business’s reacquisition of its own debt

Question 10
Correct
The Code Sec. 108(i) election for deferral of COI income:

Is made for COI income for 2009 and 2010 as a whole

(You Answered) (Correct Answer) May be applied to selected instruments and any portion of COI income realized in 2009 or 2010 from the business’s reacquisition of its own debt

May not be taken if the IRS subsequently concludes the taxpayer has COI income

May be taken for debt incurred for investments

Question 11
Correct
If a business reacquires its debt by issuing a debt instrument that has original issue discount:

(You Answered) (Correct Answer) The OID may not be deducted during the deferral period for COI income

The OID is deducted ratably through the deferral period for COI income

The OID may not be deducted, even following the deferral period

The OID may be deducted during and following the deferral period

Question 12
Correct
Upon the taxpayer’s termination of business activity, COI income or deductions that were previously deferred:

(You Answered) (Correct Answer) Are accelerated and recognized

The former business files subsequent returns in order to continue recognize the items during the original deferral period

Receive revised bases using fair market value for tax purposes

Are carried forward for five-years

Question 13
Correct
A taxpayer that defers COI income on the reacquisition of debt, using an instrument with OID:

Can also defer increases to earnings and profits (E&P) until the income is reported

(You Answered) (Correct Answer) Must increase earnings and profits in the year that the COI income is realized, but can reduce E&P as the OID deductions are realized

Must increase earnings and profits in the year realized and but cannot reduce E&P until the income is reported

Must increase earnings and profits as the OID deductions are realized

Question 14
Correct
When a taxpayer is both bankrupt and insolvent:

It can claim the bankruptcy exclusion up to the amount of insolvency.

It cannot claim the bankruptcy exclusion.

(You Answered) (Correct Answer) It can claim the bankruptcy exclusion and is not limited to the amount of the insolvency.

It can claim either the bankruptcy exclusion or insolvency for income that is deferred.

Question 15
Incorrect
Which of the following statements is true?

Each partner’s basis in the partnership interest must be increased for COI income of the partnership, with the partner’s share of income corresponding to that partner’s share of the canceled debt.

The basis of the partnership interest is increased by the partner’s share of the cancelled debt.

(Correct Answer) COI income is recognized at the partnership level and each partner is allocated a share of the income as a separately stated item.

(You Answered) COI income is recognized for each partner without regards for that partner’s share of the cancelled debt.

A basis reduction in partnership interest by cancellation of debt is not treated as distribution of cash occurring at the end of the partnership year.