Katrina White v. Comm., TCM 2023-77
This post is part of our series on recent important tax cases that may be of interest to accounting, tax, and finance professionals. For more like this, see our Federal Tax Update and California Federal Tax Update, which offer a comprehensive analysis of the year’s most pivotal tax developments.
COD Income Was Not Taxable Because Of Insolvency (Katrina White v. Comm., TCM 2023-77)
Katrina White owned and operated a body sugaring place. The business struggled and she fell behind on loan payments. Her bank loan was forgiven and the bank issued a Form 1099-C on the forgiven amount of $14,433. Ms. White did not report the cancellation of debt income on her timely filed 2016 return. The IRS examined Ms. White’s return and determined the COD income to be taxable.
At Tax Court, Ms. White argued that the discharge of the debt should be excluded from income because she was insolvent at the time of discharge (§108(a)(1)(B)). She provided a worksheet and documentation to prove her insolvency. The Court agreed the taxpayer that the discharge was excludable.
Tax practitioner planning. If the client is insolvent, complete a worksheet showing the fair market value of assets and the total liabilities at the time of discharge. Gather all of the documents that support the numbers on the worksheet.