Planning can reduce out-of-bankruptcy workout tax cost

Article Abstract:

The practice of lenders of forgiving debt even though the borrowers have not filed for bankruptcy is growing popular. In out-of-bankruptcy workouts, the lender cancels a debt in exchange for cash, property or some other recompense from the debtor. This results in a taxable cancellation of debt (COD) income or 'phantom income.' Two instances when taxable COD income is realized are when the fair market value of the property transferred to cancel the debt exceeds the debt and when a third party related to the debtor acquires the debt from a person not related to the debtor. Fortunately, not all debt discharges produce COD income. Tax is avoided in such cases as when the debt cancelled would have been deductible anyway and when the reduction in liability resulted from the settlement of a disputed claim. Instances when COD income may be excluded are discussed.

Extinguishment of debts, Debt cancellation, External debt relief, Debt relief

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Cost of giving ownership interests can be minimized

Article Abstract:

Section 2701 introduces the new tax treatment of future appreciation of transferred corporate or partnership interests. Unlike Section 2036(c) which it replaced, Section 2701 values assess at the time when the transfer was made. This effectively prevents taxpayers from overestimating retained rights to lessen the federal gift tax. Nevertheless, the new regulations are beneficial to taxpayers in that the transferred interests' value cannot be subjected to tax in the transferor's estate. Transfer taxes can also be minimized. Several techniques are suggested.

Laws, regulations and rules, Business enterprises, Transfer taxes, Gift tax, Transfer (Law), Business registration

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