Contracts,
Tax
Jul. 26, 2023
When is unpaid rent a liability?
In Catrina E. White v. Commissioner, T.C. Memo. 2023-77 (June 21, 2023), Tax Court Judge Paris looks at when unpaid rent is treated as a liability for purposes of determining insolvency. The courts have previously determined that a liability must be enforceable to be included, however, this case looked at the question of what happens if the lender takes no action to actually collect or enforce the debt.
Phil Jelsma
Partner and Chair of the Tax Practice Team
Crosbie Gliner Schiffman Southard & Swanson LLC (CGS3)
Email: pjelsma@cgs3.com
Phil is chair of the tax practice team at CGS3. He is recognized as a leading joint venture and tax attorney, with a 30-year background in real estate exchange transactions, syndications, nonprofit corporations and international tax planning.
As the retail and office rental markets continue to soften, the use of the insolvency exception to avoid ordinary income on cancellation of indebtedness is magnified. Generally, discharge of indebtedness is taxable income to the borrower. The taxable amount is the difference between what is owed on the debt and the amount paid to settle the obligation.
However, if the borrower is insolvent before and after the discharge, taxable income is ...
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