Random commentary and senseless acts of blogging.
The first Republican president once said, "While the people retain their virtue and their vigilance, no administration by any extreme of wickedness or folly can seriously injure the government in the short space of four years." If Mr. Lincoln could see what's happened in these last three-and-a-half years, he might hedge a little on that statement.
Prisoners of Azkaban
Saturday, April 21, 2007
Atrios is shocked that the IRS considers forgiven debts as income. But in this case, there's actually a sensible reason for the rule.
If I were to give Atrios a new Mercedes (sorry, Duncan, much as I love the blog, this is strictly a hypothetical) he would naturally have to pay a substantial tax on that valuable gift. Suppose instead, he were to agree to pay me the market price plus interest in 1 month. That's not income to him, since he's paying the market price. But if I immediately after forgive the debt, that is income - he gets a free Mercedes. The practical result is identical to a gift of the car, so the IRS believes, not unreasonably, that the tax result should also be the same.
The potential for abuse by employers in forgiven debt is ignored is even broader. There would be major advantages, in such a system, for employers in paying personnel in the form of loans which could after be forgiven. No payroll tax, just for starters, and the employee wouldn't have to pay income tax. Furthermore, the company could, by paying bonuses in the form of loans which can later be forgiven, pay out large bonuses without showing any actual expense on the current books - since all the payments would become accounts receivable, an asset. Those receivables could then be carried on the books until a quarter in which it would be convenient to forgive them. Lastly, since the company could exercise the option not to forgive some debts, such as those of employees who resign or are fired, the company could use the promise of forgiveness as a sort of golden handcuffs to hold current employees.
These problems probably aren't insoluble. You could create a rule which would cut a break to consumers who are renegotiating their debts without encouraging the sort of shenanigans I've described. But the task isn't as trivial as Atrios suggests, and simply not treating forgiven debt as income would be a big mistake.