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Podcast – Exclusion from Gross Income | LEGAL THOUGHTS

Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published October 7, 2020

Exclusion from Gross Income

Legal Thoughts is a podcast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Mayra Torres, the Public Relations Associate of Coleman Jackson, P.C.   The topic of discussion is “Income from Discharge of Indebtedness.” You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

TRANSCRIPT:

ATTORNEY:  Coleman Jackson
LEGAL THOUGHTS
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY:  Coleman Jackson

Welcome to Tax Thoughts

  • My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas
  • Our topic for today is: “Income from Discharge of Indebtedness.”
  • Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
  • On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: ““Income from Discharge of Indebtedness.”

Interviewer:  Mayra Torres, Public Relations Associate

  • Good morning everyone. It is a pretty chilly Autumn morning today! My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C. We are a taxation, litigation and immigration law firm based right here in Dallas, Texas.
  • Question 1:  Attorney:  Is all income taxable in the United States?

Attorney Answers Question 1:

  • Good morning Mayra. Wow that is a broad question this morning! Let me begin with Internal Revenue Code Section 61 where gross income is defined in U.S. Tax Law. That is where we must begin our discussion of taxable income in U.S. tax law. Gross income is defined in Internal Revenue Code Section 61 as all income from whatever source derived.
  • The Internal Revenue Code contains a laundry list of types of income that are taxable, but IRC Section 61 specifically states that the list is not intended to be exhaustive or complete. The types of income specifically included on the gross income laundry list are:
    1. Compensation for services, including fees, commissions, fringe benefits, and similar items;
    2. Gross income derived from business;
    3. Gains derived from dealings in property;
    4. Interest;
    5. Rents;
    6. Royalties;
    7. Dividends
    8. Alimony and separate maintenance payments;
    9. Annuities;
    10. Income from life insurance and endowment contracts;
    11. Pensions;
    12. Income from discharge of indebtedness;
    13. Distributive share of partnership gross income;
    14. Income in respect of a decedent; and
    15. Income from an interest in an estate or trust
  • Repeat: This list of taxable gross income is not exhaustive. Gross income under U.S. Tax Law is extremely broad and envision taxation of increments of wealth constituted in whatever shape or form.

Interviewer:  Mayra Torres, Public Relations Associate

  • Attorney that is a lot. Let me see whether we can narrow down our discussion to this!
  • QUESTION 2: Is any income excluded from gross income for U.S. tax purposes?

Attorney Answers Question 2:

  • Mayra, that indeed is a good strategy because as I have said the concept of gross income in U.S. tax law is a global concept. Gross income includes income derived from whatever source derived.
  • As for income that is excluded from gross income for tax purposes. Let me just limit our discussions to income from discharge of indebtedness since this could potentially be a looming problem as the economic impact of Covid-19 continues to hammer many families in their pocketbooks. Internal Revenue Code Section 108(a) states that gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge of indebtedness of the taxpayer if
    1. The discharge occurs in a title 11 bankruptcy case;
    2. The discharge occurs when the taxpayer is insolvent;
    3. The indebtedness discharged is qualified farm indebtedness;
    4. In the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness; or
    5. The indebtedness discharged is qualified principal residence indebtedness which is discharged-
      • Before January 1, 2021 , or
      • Subject to an arrangement that is entered into and evidenced in writing before January 1,2021.

Interviewer:  Mayra Torres, Public Relations Associate

  • Okay, you have listed about five categories there. Right now, could you please explain the last one you mentioned in the list in more detail.
  • Question 3: Explain what qualified principal residence indebtedness is and how it works and all?

Attorney Answers Question 3:

  • Mayra, the term principal residence indebtedness means the debt financing the taxpayer’s principal residence or place where the taxpayer resides most of the time. This is the main residence of the taxpayer.
  • The mortgage on the taxpayer’s main residence must meet both of these prongs or conditions:
    1. the mortgage must have been taking out to purchase, build, or substantially improve the taxpayer main home; and
    2. the mortgage must secure the taxpayer’s main home
    3. Let me just add that the taxpayer cannot have but one main residence which turns on all the facts and circumstances. The debt can be a second mortgage obligation if it meets requirements one and two.

Interviewer:  Mayra Torres, Public Relations Associate

  • Question 4:
  • Attorney how much of this qualified principal residence indebtedness is eligible for exclusion from the gross income of the taxpayer?

Attorney Answers Question 4:

  • Well, first of all let me say, the list of exclusions have a pecking order that taxpayers must be aware of; for example, the discharge of debt in a Chapter 11 Bankruptcy proceeding preempts all other exclusions under Code Section 108. And the insolvency exclusion that I mentioned awhile ago takes precedence over the farm debt exclusion and the qualified real property exclusion; and the principal residence indebtedness exclusion takes precedence over the insolvency exclusion unless the taxpayer makes the proper elections.
  • Now, let’s go back to your original question Mayra; please repeat your question again so that we can be clear on this.

Interviewer:  Mayra Torres, Public Relations Associate

  • Sure, no problem, Attorney! Thanks for pointing out the pecking order of the various exclusions.My original question was…
  • Question 5: How much of the qualified principal residence indebtedness that is forgiven by the lender is excluded from the gross income of the taxpayer?

Attorney Answers Question 5:

  • Okay, let me make four very important points as it relates to the amount of the exclusion of cancellation of debt income of certain qualified principal residence indebtedness:
    • Number 1: the exclusion of residence indebtedness only applies, for the most part, to debt discharged after 2006 and before 2021 or at least the taxpayer needs to have a written discharge agreement in place by December 31, 2020
    • Number 2: the maximum amount of forgiven debt that the taxpayer can treat as qualified principal residence indebtedness is $2 million dollars or $1 million if filing married filing separate; and
    • Number 3: The discharged debt must be directly related to decline in the market value of the taxpayer’s main home or directly due to the taxpayer’s disrupted or poor financial condition.
    • Number 4: The exclusion amount is limited to the part of the discharged loan that is qualified principal residence indebtedness. That simply means that the exclusion is limited to the portion of the discharged debt that meets the definition of qualified principal residence indebtedness that I discussed at the beginning of this discussion.

Interviewer:  Mayra Torres, Public Relations Associate

  • Question No. 6: Attorney, how does a taxpayer actually take the qualified principal residence debt exclusion? I mean is this on the tax return they file or what?

Attorney Answers Question 6:

  • Yes, the taxpayer must attach tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to their annual income tax return filed with the IRS and comply with appropriate instructions explaining their tax position.
  • Mayra, do you have any further questions with respect to types of income excluded from gross income? So far, we mostly have talked about qualified principal residence debt exclusion. And there are many aspects of this topic that we have not explored. I mean we could talk more about debt extinguished through repossessions and foreclosures. Any specific additional questions at this time on this debt cancellation topic?

Mayra’s Concluding Remarks

  • Attorney,Attorney thank you for answering my questions. I do have more questions involving the exclusion of canceled debt from U.S. taxation, but I can put them off to some other time.
  • Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever they listen to our podcast. Everybody take care!  And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is located right here in Dallas, Texas at 6060 North Central Expressway, Dallas, Texas 75206.
  • English callers: 214-599-0431 and Spanish callers:  214-599-0432.

 Coleman Jackson, Attorney’s concluding remarks:

 THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

  • Thanks for giving us the opportunity to inform you the exclusions of cancellation of debt income from U.S. taxes. If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Stay tune!  Watch for a new Legal Thoughts podcast in about two weeks.  We are here in Dallas, Texas and want to inform, educate, and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.