Your State Income Tax return and CODI

The Commonwealth of Massachusetts complies with all of the federal rules on CODI, deemed sales, and bankruptcy dealing with CODI except the IRC §108(i) Reacquisition of Business Debt Deferral.

For purposes of the corporate excise and the personal income tax, a taxpayer that makes the federal election allowed by IRC § 108(i) is required to add back to gross income any CODI that is deferred under IRC § 108(i). In future years when the deferred CODI is recognized for federal purposes, the taxpayer is allowed to make a corresponding subtraction, since the recognition event will have already taken place for Massachusetts tax purposes.

Hot off the Presses

In early May 2014 the IRS Office of chief counsel issued a memorandum clarifying the status of Passive Activity Loss (PAL) carryovers in regards to foreclosures under §469(a) when there is an entire disposition.

In CCA 201415002, the Office of Chief Counsel concluded that a foreclosure on real property subject to recourse debt comprising the taxpayer’s entire interest in a passive activity is a fully taxable transaction for purposes of §469(g), regardless of whether any COD income from the cancellation of recourse debt is excluded from the taxpayer’s income. Thus, the losses from the activity are treated as not being from a passive activity and are deductible against non-passive income. Further, the losses are not reduced by any excluded COD income.

The Office of the Chief Counsel was silent on the matter of being able to go back and amend returns that are still open under statute. This is something that could be a huge advantage for our clients who have lost rental property in the last several years.

This will not be effected by the Reduction in Attributes “exclusion” because this only applies to property that was lost in a foreclosure and the Reduction of Attributes applies to the basis a taxpayer holds on 1/1 of the year following the year in which the foreclosure happens. If the property was taken in the foreclosure (the only way a total disposition can happen) then the taxpayer has no basis on 1/1 of the following year.