All, I am wondering if I may have missed something on a clients return.
Mortgage debt was cancelled. But in the amount cancelled was real estate taxes the mortgage company paid on behalf of the taxpayer (taxes were not escrowed, the mortgage company paid them because they were in default). In the years this happened (there were multiple), I deducted the property taxes since they were paid and added to the mortgage principle.
Section 108(e)(2) provides that no COD income is realized to the extent that payment of the debt would have given rise to a deduction.
The phrase "WOULD HAVE" in the code seems to indicate if there were amounts in the total cancelled that WERE NOT deducted but could have been, then the COD income would not include those amounts. (reduced) Am I interpreting that correctly?? So anything that was included and was deducted is still CODI.
I guess if property taxes paid in January, debt cancelled in Feb and no deduction taken on the tax return that year for the taxes paid in January, then you would reduce the COD by those taxes even though the 1099-C has included them.