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Course Details

Dealing with Debt and Interest (Course Id 648)

Updated / QAS / Registry / EA
  Add to Cart 
Author : Danny C Santucci, JD
Course Length : Pages: 123 ||| Review Questions: 120 ||| Final Exam Questions: 100
CPE Credits : 20.0
IRS Credits : 20
Price : $129.95
Passing Score : 70%
Course Type: NASBA QAS - Text - NASBA Registry - IRS Enrolled Agents
Technical Designation: Technical
Primary Subject-Field Of Study:

Taxes - Taxes for Course Id 648

Description :

This course brings the practitioner up-to-date information on tax issues affecting interest and debt. It covers the definition of bona fide debt, the avoidance of equity and lease treatment, imputed interest rates, and debt modification. The various types of interest and their required allocation are explored and reviewed. For the economically troubled client, special attention is devoted to debt cancellation, repossession, discounts, and foreclosure. The program also discusses installment sales, equity participation debt, taxable interest, and bad debts.

Usage Rank : 17368
Release : 2023
Version : 1.0
Prerequisites : General understanding of federal income taxation.
Experience Level : Overview
Additional Contents : Complete, no additional material needed.
Additional Links :
Advance Preparation : None.
Delivery Method : QAS Self Study
Intended Participants : Anyone needing Continuing Professional Education (CPE).
Revision Date : 01-Nov-2023
NASBA Course Declaration : Participants must complete the final examination within one year of purchase and with a minimum passing grade of 70% or better to receive CPE credit unless otherwise noted on the Course History page (i.e. California Ethics must score 90% or better). After logging in click on the Course History links on your My Courses page for the Begin date and Expire date for the Final Exam.
Approved Audience :

NASBA QAS - Text - NASBA Registry - IRS Enrolled Agents - 648

Keywords : Taxes, Dealing, Debt, Interest, cpe, cpa, online course
Learning Objectives :

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 1                Deductible Interest & Debt

       At the start of Chapter 1, participants should identify the following topics for study:

    * Indebtedness
    * Deductible interest & mortgage interest
    * Investment interest
    * Nondeductible interest
    * Personal interest & capitalized interest
    * At-risk rules
    * Passive activity limitations
    * Below-market interest rate loans
    * Imputed interest on sales
    * Original issue discount (OID)
Learning Objectives:

       After reading Chapter 1, participants will be able to:
    1. Determine “interest” and select how much is tax deductible under §163 by:
      a. Identifying what constitutes bona fide debt considering economic substance and purpose and specifying how transactions with family members and controlled corporations can recharacterize alleged indebtedness into gift or business equity and the factors used in this recharacterization; and
      b. Specify the incentives to use corporate debt instead of equity, recognizing the special treatment of failed equity investment under §1244, and determining the differences among debt from installment sales, long-term and leveraged leases, and annuities.
    2. Identify deductible interest, special calculation concepts, and procedures by:
      a. Recognizing the allocation of interest based on the debt’s purpose, the application of any carryover rules, and determining net investment income and its relationship to the investment interest deduction; and
      b. Identifying the special tax treatment given to student loans, margin accounts, and market discount bonds specifying what happens to any disallowed interest expense and the timing considerations in interest reporting including interest paid in advance.
    3. Identify nondeductible interest and the provisions that deny or restrict the deduction of interest by:
      a. Recognizing when interest is nondeductible personal interest under §163(h)(1) and identifying the disallowance of interest related to tax-exempt income under §265, the life insurance interest restrictions of §264; the §465 at-risk limitations, and the application of the §469 passive loss rules; and
      b. Specifying the treatment of commitment fees and service charges based on R.R. 67-2897 and case law.
    4. Recognize the deduction of interest using either the cash method or accrual method, and determine the special elections applicable to and treatment of carrying charges under §266, below-market loans, imputed interest, and original issue discount.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 2                Allocation of Deductible Interest

       At the start of Chapter 2, participants should identify the following topics for study:

    * Allocation period
    * Proceeds not disbursed to borrower
    * Proceeds deposited in borrower’s account
    * Accrued interest
    * Loan proceeds received in cash
    * Loan repayments
    * Continuous borrowings
    * Loan refinancing
    * Debt-financed acquisitions
    * Debt-financed distributions
Learning Objectives:

       After reading Chapter 2, participants will be able to:
    1. Determine the allocation of deductible interest based on the use and repayment of the loan proceeds and identify the special rules for the allocation of interest expense in connection with debt-financed acquisitions of, and distributions from, partnerships and S corporations.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 3                Home Mortgage Interest

       At the start of Chapter 3, participants should identify the following topics for study:

    * Secured debt
    * Qualified home
    * Special situations
    * Points
    * Mortgage interest statement - Form 1098
    * Special rule for cooperative housing
    * Home acquisition debt modifications
    * Former home equity debt
    * Mixed-use mortgages
    * Grandfathered debt
Learning Objectives:

       After reading Chapter 3, participants will be able to:
    1. Identify categories of mortgages and characteristics of secured debt that influence the deductibility of interest, “qualified home,” and special situations affecting mortgage interest.
    2. Specify special situations that can impact the qualified home mortgage interest deduction.
    3. Recognize the general rule for the tax treatment of points and their exceptions, determine when a taxpayer will receive a Mortgage Interest Statement – Form 1098 and which information is included on this statement to figure interest deductions.
    4. Identify when a stock in a cooperative housing corporation owned by a tenant-stockholder is a qualified home allowing for a deduction of interest paid, and specify the limits on the home mortgage deduction to ensure that appropriate deductions are taken.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 4                Taxable Interest

       At the start of Chapter 4, participants should identify the following topics for study:

    * Dividends v. interest
    * CDs & deferred interest accounts
    * U.S. obligations
    * Miscellaneous interest items
    * U.S. savings bonds
    * Education Savings Bond Program
    * Bonds sold between interest dates
    * Insurance
    * Taxable interest on state or local government obligations
    * Tax-exempt bonds bought at a discount
Learning Objectives:

       After reading Chapter 4, participants will be able to:
    1. Identify distinctions between dividends and interest, the taxability of interest on CDs, deferred interest accounts, frozen deposits, and U.S. obligations, and specify the treatment of other miscellaneous interest items.
    2. Recognize the types of U.S. savings bonds and their tax advantages and disadvantages, identify the tax treatment of bonds sold between interest dates, and determine when life insurance proceeds are taxable or excludable from income.
    3. Identify state and local government debt obligations, the nature of the activity they fund, and their impact on whether the interest received from them is taxable.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 5                Installment Sales

       At the start of Chapter 5, participants should identify the following topics for study:

    * Installment method
    * Installment income
    * Imputed interest & OID
    * Related party sales
    * Like-kind exchanges
    * Contingent payments or price
    * Sale of a business
    * Dealer dispositions
    * Installment notes in excess of $5 million
    * Dispositions of installment obligations
Learning Objectives:

       After reading Chapter 5, participants will be able to:
    1. Recognize the importance of the installment method and, specify the §453 requirements and basic terminology associated with using the installment method.
    2. Determine the impact of §483 (imputed interest rules) and §§1271 through 1274 (original issue discount rules) on installment sales, and identify the §1038 repossession rules that apply to repossessions by sellers and repossessions of principal residences.
    3. Specify the rules associated with real property sales and casual sales of personal property, the provisions associated with the related party rules of §453 and the exceptions that override basic installment planning, identify regulations governing like-kind exchanges and their impact on delayed exchanges, and recognize the development and application the contingent payment rules.
    4. Determine the allocation of payments for a single sale of several assets among different classes according to R.R. 76-110, identify the §1060 residual method to report the sale of a business, and identify “dealer dispositions” and when installment reporting may not be used.
    5. Recognize the interest payable on installment dispositions exceeding $5 million and specify the circumstances when dispositions of installment obligations occur.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 6                Repossession

       At the start of Chapter 6, participants should identify the following topics for study:

    * Repossession of personal property
    * Non-installment method sales
    * Installment method sales
    * Basis of repossessed personal property
    * Bad debt
    * Repossession of real property
    * Figuring gain on repossession
    * Seller’s former home exception
Learning Objectives:

       After reading Chapter 6, participants will be able to:
    1. Identify the variables that determine which §1038 rules for repossessions apply, and determine basis and gain or loss resulting from repossession of personal property using the installment method and the non-installment method sales.
    2. Specify the distinctions between the rules, calculations, and effects of repossessions of personal and real property, and identify when a §166 bad debt deduction may be taken if the seller repossesses real property.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 7                Debt Cancellation & Foreclosure

       At the start of Chapter 7, participants should identify the following topics for study:

    * Income inclusion rule & exceptions
    * Real property business debt exclusion
    * General ordering of tax attribute reduction
    * Basis reduction
    * Individual and partnership bankruptcies
    * Corporate stock-for-debt rule
    * S corporation bankruptcy
    * Reporting
    * Amount realized on sale or other distribution of property
    * Discounted acquisition of debt
Learning Objectives:

       After reading Chapter 7, participants will be able to:
    1. Recognize the effect that debt cancellation has on net worth and potential income inclusion from cancellation of indebtedness income, and specify exceptions to the general income inclusion rule and their tax impact.
    2. Identify tax attribute reductions and their application when reducing canceled debt, cite the special basis reduction rules, recognize the depreciable property election in reducing the basis of depreciable property before reducing any other tax attributes, determine what constitutes individual, partnership, and S corporation bankruptcy, and specify the variables used in determining whether shares of stock issued to a creditor are nominal or token.
    3. Determine gain or loss resulting from foreclosure or repossession and their reporting and filing requirements, specify the timing and character of the gain or loss, and cite the hidden income tax danger of directly or indirectly acquiring one's own debt at a discount.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 8                Equity Participation Debt

       At the start of Chapter 8, participants should identify the following topics for study:

    * Shared appreciation mortgages - SAMs
    * Types of equity participation debt
    * Contingent interest as the measure & means of equity participation
    * Basic tests to establish interest
    * Partnership recharacterization - Culbertson Rule
    * Tax consequences of debt recharacterization
    * The “true” option rulev * Convertible indebtedness
    * Imputed interest & original issue discount
    * Accounting treatment
Learning Objectives:

       After reading Chapter 8, participants will be able to:
    1. Recognize the mechanics of equity participation debt and the value of this financing option to clients by:
      a. Identifying equity participation loans, the lender’s role in each and common elements and characteristics of shared appreciation loans along with key terms; and
      b. Specify the economic aspects of shared appreciation mortgages including the tax treatment of shared appreciation mortgages based on the hybrid concept and R.R. 83-51.
    2. Determine the types of equity participation debt by:
      a. Specifying the basic tests for loans where “interest” is measured in whole or in part by equity participation, the importance of the Culbertson rule, and the risk of partnership status;
      b. Identifying the tax consequences of being a property owner and the recharacterization of debt based on the failure to find a debtor-creditor relationship between the borrower and lender; and
      c. Specifying the conversion and option rights associated with equity participation debt, the application to debt instruments of the time value of money provisions of imputed interest, and original issue discount.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 9                Foreign Interest Withholding

       At the start of Chapter 9, participants should identify the following topics for study:

    * Fixed or determinable annual or periodic income
    * Interest paid by U.S. obligors & interest paid to controlling foreign corporations
    * Interest on real property mortgages
    * Interest paid by foreign corporations
    * Interest on tax-free covenant bonds
    * Interest on deposits
    * Payer having income from abroad
    * Bankers’ acceptances
    * Sales of bonds between interest dates
    * Portfolio interest
Learning Objectives:

       After reading Chapter 9, participants will be able to:
    1. Recognize the general tax treatment of interest received from sources within the United States, and identify the tax treatment of foreign interest by:
      a. Specifying types of interest paid to foreign payees that are subject to withholding and how to figure the tax;
      b. Identifying the requirements of tax treaties to ensure entitlement to benefits under the tax treaty and specifying statutory withholding rates for tax-free covenant bond interest; and
      c. Determining the types of interest of U.S. obligors that are not subject to withholding and the conditions of their exemption.

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

Chapter 10                Bad Debts

       At the start of Chapter 10, participants should identify the following topics for study:

    * Totally worthless bad debts
    * True debt
    * Mechanics’ liens
    * Reporting & recovery
    * Credit transactions
    * Former business bad debts
    * Insolvency of a partner
    * Business loan guarantees
    * Specific charge-off method
    * Nonaccrual-experience accounting method
Learning Objectives:

       After reading Chapter 10, participants will be able to:
    1. Identify bad debt categories and their tax treatment and effect on accounting and reporting by:
      a. Determining the concepts of worthlessness and true debt including the unique characteristics of deductible nonbusiness bad debt;
      b. Recognizing the treatment of bad debts related to political debts, mechanics’ liens, and secondary liabilities on home mortgages; and
      c. Specifying the forms used to report bad debts and the tax treatment of recovered amounts.
    2. Determine the §166 tax treatment of business bad debts by:
      a. Identifying the tax treatment of business credit transactions, loan guarantees, accounts receivable or notes receivable particularly the tax treatment of accounts receivable in a business sale, and specifying the various forms on which a bad debt deduction should be taken depending on the entity type;
      b. Recognizing the tests that must be met by an accrual method business taxpayer to be able to take a bad debt deduction for a political debt and identifying the tax consequences of the insolvency of a partner when a business partnership terminates and debts are owed; and
      c. Specifying methods that can be used by businesses to treat uncollectible amounts and the rules that apply to each.
Course Contents :

Chapter 1 - Deductible Interest & Debt



Bona Fide Debt

Economic Substance

Business Purpose

Related Party Debt

Inter-Family Loans

Loans to Controlled Corporations


Debt v. Stock Factors

Debt v. Lease

Traditional Lease

Leveraged Leases

Debt v. Annuity

Deductible Interest

Business Interest - 30% Limit

Mortgage Interest

Prepayment Penalty


Expenses to Obtain a Mortgage

Interest on Installment Purchases

Investment Interest

Investment Property

Limit on Deduction

Business vs. Investment Interest & Income

Net Investment Income

Investment Income

Capital Gain Inclusion Election

Child’s Investment Income

Investment Expenses

Losses from Passive Activities


When to Deduct Investment Interest

Form 4952

Interest Paid In Advance

Interest on Margin Accounts

Interest on a Market Discount Bond

Disallowed Interest Expense

Deduction for Student Loan Interest - §221

Nondeductible Interest

Personal Interest

Qualified Residence Interest Exception

Acquisition Indebtedness Modified

Home Equity Indebtedness Suspended

Interest on Income Tax Owed


Capitalized Interest

Production Period

Traced Debt

Avoided Cost Debt

When Interest Is Paid or Incurred

Partnerships & S Corporations

Interest Related To Tax-Exempt Income - §265

Interest on Insurance Policy Loans

Single Premium Life Insurance

Systematic Plan of Borrowing

Key Person Insurance

Deductibility of Premiums & Interest on Life Insurance

Existing Interest on Purchase

Commitment Fees & Service Charges

Corporate Acquisition Interest - §279

At-Risk Rules - §465

Loss Defined

Form 6198

Activities Covered by the At-Risk Rules

Amount At Risk

Borrowed Amounts

Related Persons

Subsequent Years

Amounts Not At Risk

Nonrecourse Financing

Other Loss Limiting Arrangements

Reductions of Amounts At Risk

Passive Activity Limitations - §469

Calculating Passive Loss

Categories of Income & Loss



Material Participation

Suspension of Disallowed Losses

Fully Taxable Disposition

Abandonment & Worthlessness

Related Party Transactions

Other Transfers

Transfer By Reason Of Death - §469(g)(2)

Transfer By Gift - §469(j)(6)

Installment Sale - §469(g)(3)

Ordering of Losses


Allocation of Suspended Losses

Rental Activity

Rental Activities of Real Estate Professionals

Working Interests in Oil & Gas

When to Deduct Interest

Cash Method

Prepaid Interest


Exception for Points on Home

Discounted Loans

Refunds of Interest

Accrual Method

Prepaid Interest

Tax Deficiency

Related Taxpayer - §267

Election to Capitalize Carrying Charges - §266

Below-Market Interest Rate Loans - §7872

Demand Loans (Gift or Nongift) - §7872(a)

Forgone Interest - §7872(e)(2)

Term Gift Loans - §7872(d)(2)

Nongift Term Loans - §7872(b)

Loans Subject To the Rules


Special Rule for Certain Gift Loans

Loans Not Subject To the Rules

Tax Avoidance Loans

Significant Effect on Federal Tax Liability

Loans to Qualified Continuing Care Facilities

Continuing Care Facility

Continuing Care Contract

Imputed Interest on Sales - §483 & §1271 through 1275

Applicable Federal Rate (AFR)

Effects of Unstated Interest

Selling Price & Contract Price

Rules for Imputing Interest

Test Rate of Interest

Relationship of §1274 & §483

Section 483

Total Unstated Interest

Transactions to Which Section 483 Rules Apply

Sale of a Farm

Sales with Total Payments of $250,000 Or Less

Land Sales Between Related Parties

Exceptions to §483 Rules

Section 1274 Rules

Exceptions to §483 & §1274

Original Issue Discount (OID)

De Minimis OID

Form 1099-OID


Debt Instrument Bought At Premium

Exceptions to OID Rules

Debt Instruments Issued From 1955 to 5/28/69

Corporate Debt Instruments Issued From 5/28/69 to 7/2/82

Debt Instruments Issued From 7/2/82 to 1/1/85

Debt Instruments Issued After 12/31/84

Recomputation of OID on Form 1099-OID

Acquisition Premium

REMIC Regular Interests

Certificates of Deposit (CDs)

Interest Subject To Penalty for Early Withdrawal

Bearer Certificates Of Deposit

Market Discount Bonds

Chapter 2 - Allocation of Deductible Interest


Use of Proceeds

Allocation Period

Proceeds Not Disbursed To Borrower

Proceeds Deposited in Borrower’s Account

Order of Funds Spent

Expenditures Paid From Checking Accounts

Expenses Paid Within 30 Days

Optional Method for Determining Date of Reallocation

Interest on a Separate Account

Accrued Interest

Accrued Interest Before Debt Proceeds Are Received

Loan Proceeds Received In Cash

Loan Repayments

Continuous Borrowings

Loan Refinancing

Partnerships & S Corporations

Debt-Financed Acquisitions


How to Report

Debt-financed Distributions

Optional Method

How to Report

Chapter 3 - Home Mortgage Interest

Home Mortgage Categories

What Happened to Home Equity Debt?

Secured Debt

Unsecured Debt

Wraparound Mortgage

Treating Debt as Unsecured

Qualified Home

Second Home

Divided Use of Home



Married Taxpayers

Special Situations

Late Payment Charge

Prepayment Penalty

Sale of Home

Prepaid Interest

Mortgage Interest Credit

Ministers’ & Military Housing

Shared Appreciation Mortgage (SAM)

Graduated Payment Mortgages (GPM)

Mortgage Assistance Payments

Ground Rent

Redeemable Ground Rent

Nonredeemable Ground Rent

Reverse Mortgage Loans

Refunds of Interest

Cooperative Apartment Owner


General Rule

Exception - Fully Deductible Points

Service Charges

Seller Paid Points

Funds Provided Are Less than Points

Excess Points

Mortgage Ending Early


Mortgage Interest Statement - Form 1098

Special Rule for Cooperative Housing

Cooperative Housing Corporation

Debt Secured by Stock

Determining Home Mortgage Interest

Limits on Home Mortgage Interest

Home Acquisition Debt

Home Acquisition Debt Limit

Refinanced Home Acquisition Debt

Mortgage Deemed Used To Buy, Build, or Improve Home

Date of the Mortgage

Cost of Home or Improvements

Substantial Improvement

Home Equity Debt Suspended

Home Equity Debt Limit

Fair Market Value

Mixed-Use Mortgages

Grandfathered Debt

Refinanced Grandfathered Debt


Line-of-Credit Mortgage

Chapter 4 - Taxable Interest

Dividends vs. Interest

Interest on Insurance Dividends

Prepaid Insurance Premiums

CDs & Deferred Interest Accounts

Borrowing To Invest In CDs

Gift for Opening Account

Interest Income on Frozen Deposits

U.S. Obligations

Treasury Bills

Treasury Notes & Bonds

Miscellaneous Interest Items

Interest on Tax Refunds

Interest on Condemnation Award

Installment Sale Payments

Interest on Annuity Contract

Usurious Interest

Interest on Money Deposited With a Stockbroker

Accrued Interest on Bonds

Bonds Traded Flat

Below-Market Loans

U.S. Savings Bonds

Series HH Bonds

Series EE Bonds

Change From Method 1

Change From Method 2

Bonds Held Beyond Maturity


Child as Only Owner

Choice to Report Interest Each Year

Ownership Transferred

Purchased Jointly

Transfer to a Trust


Savings Bonds Traded

$500 Minimum Value

Choice to Report Interest in Year of Trade

Form 1099-INT for U.S. Savings Bonds Interest

Education Savings Bond Program

Qualified U.S. Savings Bonds

Eligible Expenses

Eligible Educational Institutions

Amount Excludable

Exclusion Reduced For Certain Benefits

Modified Adjusted Gross Income Limit

Record keeping

Verification by IRS

Bonds Sold Between Interest Dates


Specified Number of Installments

Specified Amount Payable

Installments for Life

Interest Option on Insurance


State or Local Government Obligations

Tax-Exempt Interest on State or Local Obligations

Information-Reporting Requirement

Empowerment Zone or Enterprise Community

Taxable Interest on State or Local Obligations

Mortgage Revenue Bonds

Arbitrage Bonds

Private Activity Bonds

Tax-Exempt Bonds Bought at a Discount

Stripped Tax-exempt Bonds or Coupons

Redeemed Before Maturity

Market Discount on Tax-Exempt Bonds

Chapter 5 - Installment Sales

Installment Method




Special Rule

Sale at a Loss

Installment Income

Interest Income


Definitions & Terminology

Installment Sale

Selling Price

Selling Price Reduction


Basis & Adjusted Basis

Installment Sale Basis

Selling Expense

Gross Profit

Contract Price

Gross Profit Percentage

Income from Sale

Payments in Year of Sale

Electing Out of the Installment Method

Selling Price

Fair Market Value

How to Elect Out

When to Elect Out


Buyer’s Note

Assumed Expenses

Mortgage Assumed

Mortgage Less Than Basis

Mortgage More Than Basis

Wrap-around Mortgages

Mortgage Canceled


Payments of Property

Fair Market Value

Third-Party Notes





Limit on Payment Treatment


Escrow Accounts

Escrow Established In a Later Year

Substantial Restriction


Imputed Interest & OID


Sale at a Loss

Section 483 - Imputed Interest


Imputed Interest Rates

Small Transaction Exception

Intra-family Land Exception


Sections 1271-1274 & OID

OID Rates


Cash Method Debt Instrument Exception

Computation of OID

Personal Use Property - Buyer’s Deduction of Imputed Interest


Section 1038 - Repossession by Seller

Repossession of Principal Residence

Related Party Sales

Sale of Depreciable Property


Resale Rule

Related Persons


Like-Kind Exchanges

Installment Payments

Final Regulations & Delayed Exchanges

Contingent Payments or Price

Installment Sales Revision Act of 1980

Contingent Payment Sale

Maximum Selling Price Transactions


Fixed Payment Term Transactions


Transactions with Neither Maximum Selling nor Fixed Payment Term


Income Forecast Method



Special Rules


Single Sale of Several Assets

Sale of a Business

Residual Method

How to report


Sale of Partnership Interest

Dealer Dispositions


Residential Lot & Timeshare Exception

Interest Computation


Installment Notes in Excess of $5 Million

Computation of Interest



Dispositions of Installment Obligations

Gain or Loss



Tax-free Transfers

Transfers Between Spouses Or Former Spouses



Forgiving Part of the Debt


Death Transfers


Sale of Future Cash Flow

Chapter 6 - Repossession

Personal Property

Non-Installment Method Sales

Basis of Installment Obligation

Gain or Loss on Repossession

Installment Method Sales

Basis of Installment Obligation

Gain or Loss on Repossession

Basis of Repossessed Personal Property

Bad Debt

Real Property


Figuring Gain on Repossession

Limit on Taxable Gain

Repossession Costs

Indefinite Selling Price

Character of Gain

Basis of Repossessed Real Property

Holding Period for Resales

Buyer Improvements

Bad Debt

Seller’s Former Home Exception

Chapter 7 - Debt Cancellation & Foreclosure

Income Inclusion Rule

Exceptions from Income Inclusion

Order of Exclusions

Bankruptcy Case Exclusion - §108(a)(1)(A)

Insolvency Exception - §108(a)(1)(B)

Qualified Farm Debt Exclusion - §108(a)(1)(C)

Qualified Farm Debt - §108(g)(2)

Qualified Person - §108(g)(1)

Real Property Business Debt - §108(a)(1)(D)

Qualified Debt

Exclusion Limit

Ordinary Income Recapture


Deemed Distribution Rules

S Corporations

Student Loan Exception - §108(f)

Tax-Exempt Educational Organizations - §108

Purchase Money Debt Reduction Exception - §108(e)(5)

Cancellation of Deductible Debt Exception - §108(e)(2)

Reduction of Tax Benefits (Attributes) - §108(b)

General Ordering of Tax Attribute Reduction

Basis Reduction

Depreciable Property Election


Required Reduction

Timing of Basis Reduction

Limit on Basis Reduction

Recapture of Basis Reductions

Exempt Property

Special Basis Reduction Rule for Qualified Farm Debt

Qualified Property

Basis Reduction Order

Exclusion Limit

Individual Bankruptcy

Partnership Bankruptcy

Depreciable Property

Allocation of Debt-Discharge Income

Corporate Stock-For-Debt Rule

Token Share Inclusion

Workout Inclusion

Recapture of Gain on Later Sale

Debt Contributed to Capital

Debt-For-Debt Exchange

Earnings & Profits

S Corporation Bankruptcy

Net Operating Losses

Adjustments to Shareholder’s Basis in Debt

Bankruptcy Estate as Shareholder


Amount Realized On Sale or Other Distribution of Property


Nonrecourse Indebtedness

Recourse Indebtedness


Form 1099A

Timing & Character of Gain or Loss



Mortgage Relief Act of 2007

Qualified Principal Residence Indebtedness

Mixed Indebtedness

Lender’s Tax Impact

Foreclosure Sale

Discounted Acquisition of Debt

Transactions Involving Related Parties

Related Persons

Chapter 8 - Equity Participation Debt

Shared Appreciation Mortgages - SAMs


Put & Call

Equity Investment

Loan with Option

Net Cash Flow Participation

Incremental Participation

Common Elements

Characteristics of A SAM

Appreciation Definition


Importance to Borrowers

Economic Compromise

Expiration of Term

Importance for the Lender

Tax Treatment Overview

Hybrid Concept

Revenue Ruling 83-51

Types of Equity Participation Debt

Contingent Interest

Option or Conversion Right

Contingent Interest as the Measure & Means of Equity Participation

Basic Tests to Establish Interest

Application to Equity Participation

Farley Realty Corp

Kena, Inc.

Caselaw Factors

Revenue Ruling 83-51

Significance of R.R. 83-51


Corporate Application & §385 Analogy

50% Cut Off Rule


Locked Interest Exception

Application to SAMs

Value of Debt vs. Equity Features

Non-Corporate Borrowers

Partnership Recharacterization - Culbertson Rule


Mayer Case

Walsh Case

Profits & Losses

Astoria Case

Hartman Case

Walsh & Wheeler Cases


Tax Consequences of Debt Recharacterization

Confirming Debtor/Creditor Status

Failure to Find Debtor/Creditor Status - Recharacterization


Contingent Interest as Preference Return

Revenue Ruling 81-300

Fixed Interest as Guaranteed Payments


Partnership Income & Loss

Determining Distributive Share


Nonrecourse “Loan”

Recourse “Loan”

Section 704(d) - Basis Limit on Deductions

Basis & Section 752

Who Gets Basis For The “Debt”?


Option & Conversion Rights

The “True” Option Rule

Recharacterization Risk

Original Issue Discount - A Special Issue for Conversion & Option Rights

TRA ‘69 & ‘84 - Application of OID to Options

Section 1273 - Element Allocation Rule

Section 1272 - Daily Income Concept

Convertible Indebtedness - A Different Rule


Tax Consequences of Conversion

Conversion to Partnership Interest

Conversion to Direct Ownership

Imputed Interest & Original Issue Discount

Separate Concepts

Original Issue Discount (“OID”)


Stated Redemption Price

Issue Price


Imputed Interest

General Rule & Test Rate

Regulations’ Escape Hatch

Accounting Treatment

APB No. 21


Chapter 9 - Foreign Interest Withholding

Fixed or Determinable Annual or Periodic Income

Interest Subject to Withholding

Interest Paid By U.S. Obligors

Interest on Real Property Mortgages

Interest Paid To Controlling Foreign Corporations

Interest Paid By Foreign Corporations


Tax Treaties

Interest on Tax-Free Covenant Bonds


Interest Exempt from Withholding

Interest on Deposits

Payer Having Income from Abroad

Bankers’ Acceptances

Sales of Bonds Between Interest Dates

Portfolio Interest

Unregistered Obligations

Registered Obligations

Registered Obligations Targeted To Foreign Markets

Nonqualifying Payees

Contingent Interest Rule


Chapter 10 - Bad Debts

Non-Business Bad Debts

Totally Worthless

Determining Worthlessness

Required Basis or Income Inclusion

True Debt

Loan or Gift

Loan Guarantees

Political Debts

Mechanics’ Liens

Insolvency of Contractor

Secondary Liability on Home Mortgage



Business Bad Debts

Credit Transactions

Income Inclusion

Accrual Method Taxpayers

Cash Method Taxpayers

Former Business

Debt Acquired from a Decedent

Political Debts

Insolvency of Partner

Business Loan Guarantees


Methods of Treating Bad Debts

Specific Charge-Off Method

Partly Worthless Debts

Deduction Disallowed

Totally Worthless Debts

Recovery of Bad Debt

Property Received for a Debt

Bankruptcy Claim

Sale of Mortgaged Property

Net Operating Loss

Nonaccrual-Experience Accounting Method

Performing Services

Interest & Late Charges



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