Significant Business Tax Provisions in the American Recovery and Reinvestment Act of 2009
By Joseph P. Opich
Cancellation of Indebtedness Income Deferral
Background An issuer of debt generally recognizes income when the issuer or a related party repurchases the debt for less than its issue price or the debt instrument is modified in a way that constitutes a taxable exchange for a new debt instrument with a lower issue price or an exchange of the debt instrument for an equity interest. If the issuer is insolvent or in a bankruptcy proceeding at the time of the debt cancellation, it may exclude the income but reduce its tax attributes, such as its net operating loss carryforwards and tax basis.