Lender’s Release of Personal Guarantee Does Not Impute Taxable Income

I recently wrote a blog post about avoiding imputed income from debt forgiveness following a foreclosure against a business owned property. I suggested that a business that is organized as a C corporation would not pass through imputed income to its individual owners, but I stated I was unsure if there would be personal income when an individual corporation owner personally guaranteed the loan.

One of my blog readers, and a tax attorney, wrote me an email about the effect of a personal guarantee on forgiveness of a corporation’s mortgage note. The email cited two tax court decisions which held that the release of a personal guarantee does not ordinarily result in imputed income even if a guarantor becomes liable under the terms of the guarantee. The reason is that a guarantor does not directly receive the income and the money loaned does not increase the guarantor’s personal assets. See, for example, 61 F. 2d 751

Last updated on May 22, 2020