Impact
Under federal income tax, a loan is not gross income to the borrower because the borrower has an obligation to repay the amount received and there is no accession to wealth. Along those same lines, the lender may not deduct the amount of the loan because the loan merely converts one asset (cash) into another asset (a promise of repayment). Furthermore, if the lender forgives or cancels the debt there may be income tax consequences for the borrower.
These general axioms directly affect many taxpayers because millions of individuals across the United States deal with loans and indebtedness. As a result, the principles discussed and analyzed in Zarin v. Commissioner are relevant to any taxpayer concerned with those issues. According to the decision, a cancellation of debt through settlement proceedings, no matter the amount of pre-settlement indebtedness, releases the taxpayer from the debt obligation without creating taxable income. "The excess of the original debt over the amount determined to have been due is disregarded for both loss and debt accounting purposes."
Read more about this topic: Zarin V. Commissioner
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