To determine the insolvency amount (liabilities in excess of assets) the IRS takes into consideration all assets owned by the taxpayer including bank accounts, investments, real estate, business ownership, and retirement savings
The exclusion does not apply if the loan terms require the services to be provided to one or a few specified employers, such as a specific hospital. In such a case, the discharge would result in compensation income. Sec. 108(f)(1) from this source specifies that the loan terms must require the student to work “in certain professions for any of a broad class of employers,” and an acceptable broad class ple, hospitals in rural areas in the United States. The exclusion only applies to specified loan forgiveness programs and does not apply to other financial incentive programs designed to attract workers, which are typically considered compensation and do not represent loan forgiveness.
Liabilities may include credit card debt and mortgage debt along with student loan debt
Widely publicized cases of for – profit colleges folding and leaving students with no degree and large amounts of debt have led to the discharge of certain student loans by the U.S. Department of Education. 31 There is both a “Closed School” discharge process and a Defense to Repayment discharge process based on misrepresentations made to students. 32 While these Education Department programs forgive the loans, it remained unclear in some cases whether the debt forgiveness resulted in gross income to the borrower. The IRS was concerned that the analysis involved in determining whether another exception would apply (e.g., the insolvency exception, discussed below) would impose a compliance burden on both the IRS and the students with very little resulting taxable income. As a result, Rev. Procs. 2015 – 57 and 2017 – 24 state that the IRS will not assert that a taxpayer recognizes gross income as a result of the Defense to Repayment discharge process or Closed School discharge process. Continue reading “Another basis for student loan borrowers to exclude cancellation – of – debt (COD) income is that they are insolvent”