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

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