General Taxation of COD Income
Under the Code, U.S. persons, including corporations, are taxed on their worldwide income. Sec. 61 defines gross income to include COD income.
When a debtor recognizes COD income, the creditor may receive a corresponding Sec. 165(g) worthless securities deduction or a Sec. 166 bad debt deduction.
What does this mean ? You are sent a 1099 A for Abandonment of claims meaning the cost to charge off bad debt the lender owed its creditor and never satisfied .
Problems arise where the HUD shows the amount owed the existing lines of record were in fact paid. The second issue is where the amount paid by borrower was never wired into closing … or funds were rerouted into a bank depository as trust funds used to acquire a series of pass through certificates.
In either event your left holding the bag for the amount owed by the lender to the foreclosing party, the amount that failed to wire to the existing lien holders and loss of title that was irrevocably conveyed after closing
Sec. 108 provides several exceptions to the definition of COD income. For example, Sec. 108(e)(6) provides that a capital contribution [meaning homes and mortgages for stock ] issued by banks in the form of debt forgiveness by LLC officers and directors as shareholder-creditor that generally does not involve an issuance of stock of the debtor produces COD income only to the extent the outstanding debt exceeds the contributing shareholder’s adjusted tax basis in the debt.
More importantly under Sec. 108(e)(8), a member bank as Chase a Delaware Corporation recognizes COD income if it transfers stock in satisfaction of its debt….MEANING YOU PURCHASED THEIR WORTHLESS SHARES BY CONVEYING YOUR HOME and at that time A MORTGAGE WAS CANCELLED AS IF IT WAS PAID IN FULL SATISFACTION.
CLAIMS BROUGHT BY LAWYERS IN CONSUMERS DEFENSES ARE …lets say off base and not on target. Its true the fair market value (FMV) of the stock will always be less than the adjusted issue price of the debt.
Thus, when mortgages are forgiven by a banks officer and directors shareholder-creditor and no new stock is issued, the consumer debtor recognizes gain to the extent the adjusted issue price of the debt exceeds the shareholder-creditor’s basis in the debt.
The shareholder-creditor increases its basis in the stock of the debtor in an amount equal to the adjusted issue price of the debt (see also Sec. 1016(a)(1), Regs. Sec. 1.1502-19(d)(1), and Letter Ruling 201337007).
More to follow so please stay tuned – difficult subject matter is tough to digest when its valuable to your claim. email@example.com