lOAn
GR-loan is not GI-(even flow of stgh in value)
Repayment-see expenditure
-loan when rec'd
not take a deduction b/c not income
-this is b/c principle that follows�when repay not deductible
not take a deduction b/c not income
-this is b/c principle that follows�when repay not deductible
yes this is deductible
-this is outflow, and deductible
-if paying interest (Cost of biz)�this is deducttible
-Interest-charge for time use of money.
-but can be issues on this (though generally not deductible)
Hypo:
creditor lends $
-expectation it will be repaid (i.e. do nothing w/ it)
-to lend money (this is outflow)
Q: is this deductible?
-Yes, could be BUT
-money represents their capital which they are lending for a promise to pay $ (sounds like investment like buying bookcase)
-i.e. this is NOT deductible (NOT deductible
Repayment (of principal)
Q-is this income?
-No not income
Q: What the debtor pays over time is this taxable?
-Yes, sec 61
Hypo:
debtor:
assets of 20k
Liabilities: 0
Debtor takes out the loan (this is a liability & considered an asset)
Q: loan proceeds come in-when look at debtor is this income?
:no not income, but have obligation to repay.
Hypo Cont.
-debtor�has financial difficulty
Q-if person likely will not be able to pay loan, is this taxable event? (i.e. student w/ student loans)
-when they borrowed money, student is assumed to repay the loan.
-this is UNTIL we know that student cannot pay the loan (must be certain)
e.g. statute of limitations runs (i.e. not repayment on loan enforceable anymore)
e.g. creditor may look at debtor�c
Hypo CONT. q: What are assets/ebefore after loan?
-30k before
-30k after
Hypo:
DEBTOR Borrow 10k
Q1 income?
K understanding creditor assuming debtors will repay
tax law is based on this notion
Q2 what if you do not repay?
Q1 not income�b/c will repay when borrow
Q2 -it has to be considered GI
-I.E. 10k from loan becomes GI
HOWEVER, Kirby lumber changes this
Hypo:
what happens if?
Assets 20k (+10k loan)
Liabilities 10k loan
Net worth: 30k
Q1: if getting liability canceled, what is happening to assets person had?
Q2: BEFORE liability is canceled, what is net worth?
Q3: Q: Aft
Q1: -they can't pay debts, may have lost all their assets
-therefore liability is canceled
Q2 -negative net worth of 10k
Q3--0
Q4-
-no income at all�both are cancelled
-court says income from cancelled debt�freezes up assets.
-makes you better off
-here t
Hypo: Biden has student loan. 100k debt. doesnt pay
Q1 is Biden better off?
Q2: Q: econ better off b/c this?
-better off if do not need to repay.
-assume get a job to repay.
Q2
assets: 0
loiabilities: still 100k
-limitation of SCOTUS�biden as student is involvent
Sec 108-insolvent or bankrupt
-if one is insolvent or bankrupt (Title 11 proceeding)
-e.g. person get loan forgiven in part or fully
-discharge amount is NOT income
-in many situations, when have tx that rec'd loan proceeds (principal which flows) and supposed to be repayment
Sec 108-loans treated as.
-tx will use principal of loan to either buy stgh (i.e. bookcase)�the person will be given basis in bookcase
-this basis from principal of loan will be treated as debtor's capital (which was creditor's capital)
-debtor has capital (even thogh some1 else's
108(b)-payback system
-take amount of forgiven-discharged loan (not GI under 108(a)
-this amt�try to tell TX to give u tax benefits
-this could be basis
-"net operating loss deductions"-this could be carryed over to next year (w/ notion of payment)
-Congress affirms giveaway-n
Hypo: (helps understand) Problem 1 pg 184 (what is settlement�is it disputed?)
Hypo: 30k for price of car, finance loan w/ dealer for 30k.
-drive car out of parking lot, week later engine blows up.
-go abck to car lot, want them to take it back.
-dealersh
-this is renegotiated prrice (this is disputed claim)
Hypo: D'r gives 10k to D'ee
D'ee I can pay 7k (w/ help)
D'r can settlement for 7k (instead of original 10k)
Q: is this taxable income?
if not insolvent, this is GI.
if insolvent, this is NOT GI
-cash for stgh, no income as long as nothing else going on
-creditor is taking what he can get (i.e. this is NOT a disputed debt/BPR does NOT apply)
-debt was 10k�amt borrowed/issue is D'ee cannot
Hypo: problem 1 b help
Debt: 10k
Appraiser-painting is 10k
Q: any deduction/ discharge under 108?
-no painting is worth full amt ie debt has been fully paid, i.e. no part can be discharged.
-way to tax�-like sec 83-gov't can say that you have E'ee who pays 10k for painting
Hypo C probelm 1 pg 184
-10k loan to debtor
-paid 8k in cash
-loan not income when took it out/pmt is not deducitble when you pay it
Q1: 8k in cash deductible?
Q2-paid 8k in cash is not taxable
Q1: -paid 8k in cash is not taxable
Q2: -we know disposition of painting
-go to problem b�paid with 8k value/8k basis
-look at tax implications probbably similar
-sold painting and paid a debt (this is exchange)
-start w/ sale and purchase�this is called
108 (b)
-requries TX to relinquish certain tax benefits b/c Congress see rel'ship b/t $ and opportunity to creat tax benefits
-i.e. spend $ on E'ees and get deduction
payback system
-i.e. must pay back benefit of exclusion giving up tax benefits, BUT silver lining
-Congress tells which one person must pay back
-when get instrictuions, when you get to end of payback i.e. NOL (net operating loss)�otther capital loss (cover late)
payback system-amt exlcluded?
-Amt excluded-Congress will not make payback to what was excluded-relinquish tax benefits if you have them
-If amt is NOT been paid back, we do not care�never go back to say it was GI.
-i.e. some TX pay back nothing�they will get exlcusion (Even if TX pay
1017 (a)
-about what assets to take
-b(2)-limitation in certain situation
-in case of discahrge where sec 108(a) applies
-we have a bankruptcy here, i.e. maybe this applies so go on in statute
1017(a) forumla
Aggregate basis of property after the discharge ($100,000) and
BY
The aggregate liabilities after the discharge in insolvency ($100,000)
-(i.e. basis MINUS liabilities)
1017--explained
-see basis to see of reduction in basis
-compare basis with liability remaining
-only when basis exceeds remaining liabilities, is there possibly a deduction
-Congress-allows to keep basis to extent of liabilities
-bonified obligation to repay