Forgiveness of loan to charity - cash or non cash?

Technical topics regarding tax preparation.
#121
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So, I suppose you have been paying attention but just couldn't be bothered until now to address what I was actually saying?


More like this: I’ve been shooting down, throughout this thread, the bastardized version of tax law ownership that you’ve created in your own mind.

"Transfer" doesn't inherently mean "give ownership."


It does when you’re talking about loan proceeds. If it doesn’t, then you don’t have a loan, so there’d be no loan to forgive. Anyway, enough about your bastardized version of tax law ownership.

The takeaway is that the cash was transferred, as you now admit. Any constructive cash analysis follows the cash. So Nilodop had in right in Post #110.

Case closed.

But maybe you’d like to alter your theory again…and start with the charity having the cash and then you’d take it from there?

Not sure if you’ll respond to that, since you haven’t responded to prior requests to explain, in detail, your constructive cash contribution theory…
 

#122
Chay  
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Jeff-Ohio wrote:I’ve been shooting down, throughout this thread, the bastardized version of tax law ownership that you’ve created in your own mind.

I challenge you to point to a single criticism of my theory that you have actually supported with evidence and which I haven't countered with equal or better evidence.

"Transfer" doesn't inherently mean "give ownership."


It does when you’re talking about loan proceeds.

It doesn't. "To lend" means "to let out (money) for temporary use on condition of repayment with interest," according to the definition I posted in #84. Temporary use. Not permanent control. So, "transfer" doesn't mean "give ownership" in that context any more than it does in any other context.

But assuming arguendo that "transfer" does mean "give ownership," that wouldn't change a thing. The Supreme Court holds that taxpayers do not have complete dominion over funds subject to an obligation to repay. They, and you, agree that a constructive cash transfer takes place when a deposit liability is extinguished. The constructive transfer is accompanied by a transition from the depositor having a right to reclaim the money to having no right to reclaim the money. You are free to call that transition whatever you wish. Whatever you want to call it, it's real and it has a tax effect.

The Tax Court, the IRS and I are in agreement that this type of constructive cash transfer can happen when the liability is a loan and the method of extinguishment is forgiveness of the loan. You have a problem with this concept. I'm not sure whether you dispute that it can happen at all or if you only dispute that it can happen in a charitable donation context. Either way, you have completely failed to explain the distinction. Instead, you have been busy promoting non-dictionary definitions of words. You want to be creative with your words? Go ahead. Give us your own version of what happens during a constructive cash transfer on extinguishment of a liability, then tell us why that can't happen in the OP's facts.

But maybe you’d like to alter your theory again…and start with the charity having the cash and then you’d take it from there?

Not sure if you’ll respond to that, since you haven’t responded to prior requests to explain, in detail, your constructive cash contribution theory…

Sure, I'll respond to it. My response is that you already know how my theory works, as you showed in #117 with your synopsis. The only thing you don't know is that neither "transferring" nor "lending" means "giving ownership of."

But that doesn't matter anymore, and neither does my theory about "ownership," since I'm giving you a free pass to use those words however you want. Now, I wonder whether you'll be able to describe, at last, the secret mechanism that prevents constructive cash transfers on extinguishment of a liability from applying to section 170?
 

#123
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I challenge you to point to a single criticism of my theory that you have actually supported with evidence and which I haven't countered with equal or better evidence.

When you make a loan to someone, they own the cash, you own the Receivable. You don’t own both. There you go. This stops your theory dead in its tracks.

They, and you, agree that a constructive cash transfer takes place when a deposit liability is extinguished.

When it’s extinguished via satisfaction, not when it’s extinguished via forgiveness.

The Tax Court, the IRS and I are in agreement that this type of constructive cash transfer can happen when the liability is a loan and the method of extinguishment is forgiveness of the loan.

The Tax Court never said such a thing. I’m pretty sure every TC judge understands that income from debt forgiveness, for example, is non-cash. This is why it’s sometimes referred to as “phantom.” And that is also why it referred to as “an amount.”

You want to be creative with your words?

It is you that is being creative. A transfer of cash in exchange for a Receivable. Chay says he owns both. That’s a great definition of lending. It’s a bastardization of reality, the transaction and the concept of tax law ownership. You’re acting like if anyone has a claim against your asset, that person owns your asset. If you give someone cash and tell them to repay you, but you also tell them you still own the cash, then there’s no repayment to be made. The charity is just holding your cash as your agent. No loan under your theory.

The only thing you don't know is that neither "transferring" nor "lending" means "giving ownership of."

Right, Chay. If that’s the case, then the business borrower wouldn’t get any deductions with the money you lent to him…because all those business expenses he paid was not with his own funds, they were with your funds.

Now, I wonder whether you'll be able to describe, at last, the secret mechanism that prevents constructive cash transfers on extinguishment of a liability from applying to section 170?

If you want the answer to a “real” situation, involving true facts, not bastardized facts based on your fantasy world, it would go like this:

Guy lends cash to a charity. Charity has the funds. Guy cancels the debt. The fiction is that the charity, who currently has the funds, repaid the loan and the guy, who now holds the funds, then made a cash contribution to the charity. This doesn’t work, given that the loan was paid off with these constructive transfers. That doesn’t reflect reality, since the loan was forgiven.

Change the sequence. After guy lends funds, he makes a constructive cash donation to the charity. Now the charity has double the funds. Charity is then deemed to repay the loan. This doesn’t work either, for the same reason as above.

What would work is if actual cash changed hands.

You can’t just make stuff up, Chay, and then argue that constructive transfers took place. If you could, then as I write, I just made 20,000 charitable loans to 20,000 different charities and the 20,000 charities just repaid me. That’s your world of constructiveness. But the real world of constructiveness would tell us there were no actual transactions, so there is no way possible for any constructive transactions to mirror reality.
 

#124
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I'm responding to post #123 in two parts. The first part relates to Jeff's claim that he's been "shooting down, throughout this thread, the bastardized version of tax law ownership" that I've asserted.

The reason I'm setting this first part off from the second is that as I said in #122, my "ownership theory" doesn't even matter anymore because I've got enough evidence to disprove Jeff's claims without even relying on that theory. So I suppose you'd say that I'm arguing "out of principle" at this point.

Jeff-Ohio wrote:
I challenge you to point to a single criticism of my theory that you have actually supported with evidence and which I haven't countered with equal or better evidence.

When you make a loan to someone, they own the cash, you own the Receivable. You don’t own both. There you go. This stops your theory dead in its tracks.

As far as I can tell, and please correct me if I'm wrong, your evidence to prove your "don't own both" theory is as follows:

  1. Transfer of ability to use: "Ownership entails a bundle of rights, one big one is the right to use and enjoy the asset. That big right does not extend to the guy who lent the money" (post #39) "If you give someone cash and tell them to repay you, but you also tell them you still own the cash, then there’s no repayment to be made. The charity is just holding your cash as your agent. No loan under your theory." (post #123)
  2. Mutual exclusivity: "A Receivable is not a distinct asset under Chay’s theory" (post #49); "Hmmmm, let’s see. Chay’s Note went away currently, and so did his Cash, but he says they are not one in the same. Remarkable." (post #81) "Either you are saying that the Note is Cash or you are denying the existence of the Note as a separate, distinct and identifiable asset for all purposes" (post #100).
  3. No physical possession: "All I retain is a 'claim' to the cash, not the cash itself (despite your erroneous dominion and control argument). When I forgive, I physically release my claim, not my cash, since the cash was already released." (post #86)
  4. Contradictory accounting principles: "When the charity records the entry to book up the forgiveness, there won’t be any credit to Cash." (post #56); "The accounting entries prove it out." (post #62); "maybe your charity issues financial statements. Can’t wait to see how they handled the debt forgiveness on its Statement of Cash Flows" (post #83); "[Accounting entries are controlling for federal tax purposes because] no cash was transferred to the charity in the current year. We account for things accordingly." (post #100). "You lend $10k out and claim the cash is still your property. Now you have $20k of assets, the cash of $10k and the $10k value of the Note." (post #111)
I may have missed a few manifestations throughout your many posts, but I believe those are your four points. Basically, I don't have any ownership interest in the cash anymore because I've given up the right to spend it, I now have a different asset which I can point to, I no longer have physical possession of the cash, and we don't treat me as having the cash anymore for accounting purposes.

Every one of these points was answered by my comparisons of a cash lending arrangement to arrangements involving real estate that is lent out, rented, or otherwise not available for use by the title holder. See posts #38, 40, 42, 82, and 112. Real estate and other assets in that situation behave exactly as I've described a cash lending arrangement, and you can't explain what makes cash so different.

Here are your and Nilodop's attempts to explain why cash is different:

Nilodop drew a distinction in #41 and #45 between a rental arrangement and a note receivable because "donating the lease only gives up the right to collect rent, but donating the note gives up the right to collect interest and principal." But the mere fact that the function of a title to property and a rental agreement are embodied in a single document in the case of cash doesn't defeat the analogy. There would also be a single document asserting ownership in the case of personal property for rent with no separate title, such as lawn equipment.

You accused me twice of not understanding property laws in #83 and #117, but both times you were unable to explain what you meant when I asked you directly.

In #113, you invoked accounting concepts and your own understanding of "ownership," but these superficial differences don't alter the substance of each arrangement, as I explained in #115.

In #83, you told us that "you don’t 'lend' real estate," but that's not true according to the definition of lend, and you haven't given any reasons why we should favor your special definition of "lend" that involves transferring ownership over the normal definition that doesn't.

So I'd say I've got "equal or better evidence" right here, and that's before we even start talking about my evidence related to "dominion and control" and deemed cash transfers within case law.

Right, Chay. If that’s the case, then the business borrower wouldn’t get any deductions with the money you lent to him…because all those business expenses he paid was not with his own funds, they were with your funds.

This criticism of the "ownership theory" is meritless due to the fungibility of cash, which I explained in post #32 before you even joined the discussion.

In the end, I think fungibility is what it all comes down to, more so even than the "accounting mindset" I've mentioned previously. You can't accept that a creditor "lends" cash in the sense one might "lend" real estate because most of the cash is spent and disappears shortly after the loan is made. But if you look at the other definition of "lend" from post #84, the one that applies to non-cash property, you'll see that the borrower can return "the same or its equivalent" and still meet their obligations under the arrangement. And no, that doesn't mean you can give me your clothes in lieu of returning my pen; what it means is that you can go out and buy me a new pen of the same type if you break the one you borrowed.

All of that having been said, what we really should have been arguing about are the deemed cash transfers that taxpayers are capable of making under tax law principles. My rationale for why they can happen is that the taxpayer retains a degree of "dominion and control" that allows them to dispose of the funds in that way. This is either a limited ownership interest or its functional equivalent. You don't agree with that, but you agree that the transfers can happen. So, we shouldn't really care as much about why they can happen as we should about when they can happen.
 

#125
Chay  
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This is the second part of my response to #123. In this post, I'm continuing to assume arguendo that Jeff is right in everything he said about the nature of a lending arrangement, and a creditor has no ownership interest in cash they've lent.

Jeff-Ohio wrote:
They, and you, agree that a constructive cash transfer takes place when a deposit liability is extinguished.

When it’s extinguished via satisfaction, not when it’s extinguished via forgiveness.

That's the same thing you said in #113. My response now, as it was then, is "why"? What crucial difference is there between a "satisfaction" and a "forgiveness" that allows deemed cash payment treatment for one but not for the other?

The Tax Court, the IRS and I are in agreement that this type of constructive cash transfer can happen when the liability is a loan and the method of extinguishment is forgiveness of the loan.

The Tax Court never said such a thing. I’m pretty sure every TC judge understands that income from debt forgiveness, for example, is non-cash.

If the Tax Court never said such a thing, then what are they saying in the following cases?

    R. D. Walker, supra, involved a recapitalization wherein the taxpayer exchanged his common stock for a cancellation of his indebtedness and new preferred and common stock. The taxpayer there conceded, and we agreed, that cancellation of his debt to the corporation was the equivalent of cash and constituted "other property or money" within the meaning of section 112(c) (1) of the Revenue Act of 1928.
    [...]
    John L. Hawkinson, supra, involved a reorganization of two corporations in which the indebtedness of the taxpayer to one of the corporations was canceled. We there stated, "That the debt cancellation was the equivalent of cash is apparently accepted by both parties and finds support in R. D. Walker, 34 B.T.A. 983," and concluded that on the facts presented such cancellation of indebtedness resulted in the distribution of a taxable dividend to the taxpayer.
    Kniffen v. Commissioner, 39 T.C. 553, 567 (1962)

    In this case, the profit-sharing trust did not forgive or release petitioner's obligation to repay the loans; petitioner in effect paid his debt. Petitioner offset the amount of his liability to repay the loan (either as the debtor under the notes or as a fiduciary of the trust) against the amount of his benefit in the profit-sharing trust. The discharge of that liability served as a medium for payment of an equal amount of his vested benefit under the profit-sharing trust. It is as if the trust had distributed the $181,225.41 to him, and he in turn had used those funds to pay his debt to the trust. Therefore, the debt discharge is treated as a constructive distribution to petitioner from the profit-sharing trust and is taxable as a distribution.
    Caton v. Commissioner, 69 T.C.M. 1937 (1995)

This doesn’t work, given that the loan was paid off with these constructive transfers. That doesn’t reflect reality, since the loan was forgiven.

So that's the big secret? A loan can't be deemed paid off when it's forgiven, therefore the cash can't make its way over to the creditor and then back to the debtor in a deemed series of transactions?

I think you're going to have to explain a little more why that can't happen in light of Walker, Hawkinson, and Caton, referenced above. It sure looks a lot like that's exactly what happened.

You can’t just make stuff up, Chay, and then argue that constructive transfers took place. If you could, then as I write, I just made 20,000 charitable loans to 20,000 different charities and the 20,000 charities just repaid me. That’s your world of constructiveness.

That's not my world. That was the world of Kenneth and Barbara Allen in Allen v. Commissioner, 92 T.C. 1 (1989). In that case, the petitioners tried to deduct money they gave to a charity which was borrowed from an organization related to the charity. The Tax Court shot them down, saying "〚i]n the circumstances of this case, the donee did not receive a benefit from the loan portion of the claimed contribution" because "[t]he same money was recycled again and again, through the money circle, with essentially no new infusions of cash."

Collins v. Commissioner, 60 T.C.M. 542 (1990) was a similar case in which "[t]he financial position of the charitable organizations before and after the alleged contribution was identical. Neither charitable organization was benefited or enriched in any way in 1986 by petitioners' signing of several pieces of paper."

But guess what happens if a charitable organization actually is benefited or enriched via a loan cancellation? The financial position of the charity improves by an identifiable dollar amount. Even if the only actual event was the "signing of several pieces of paper," there's still a monetary transaction, just like there was in Walker, Hawkinson, and Caton.
 

#126
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In Walker, the phrase "cancellation of indebtedness" is used loosely. It was part of an exchange in a recap.
In Hawkinson, the phrase "debt was canceled" is similarly loose wording. It was part of an exchange in a reorg.
In Caton, "discharge of that liability" is equally loose language for a transaction that was a repayment of debt with another asset. "... as if the trust had distributed ..." speaks to the result, not to whether it was a cs distribution.
And in each of these, the question of cash or property was not at issue in the sense that it is under 170.
 

#127
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In #83, you told us that "you don’t 'lend' real estate,"


That’s right. If you really did lend the entirety of your real estate to someone, inclusive of all rights attendant thereto, then they could sell it or even bulldoze it. But let me guess, your “lease” (not your lending document) didn’t convey those rights. This means you didn’t lend the real estate, although you continue to say you did.

This criticism of the "ownership theory" is meritless due to the fungibility of cash


Fungibility has nothing to do with it. You’re simply conflating a claim to something with actual ownership of that something.

In the end, I think fungibility is what it all comes down to


I don’t. Fungibility hasn’t nothing to do with it. What you really don’t understand is the modern theory of COD income and how and why the accounting period concept applies to it. That concept severs the cash string that you are so tightly holding onto.

All of that having been said, what we really should have been arguing about are the deemed cash transfers that taxpayers are capable of making under tax law principles.


You’ve already made your arguments in that area and they are meritless. And I’ve told you why.

…I’m on Victory Lap #100 at this point…

If the Tax Court never said such a thing, then what are they saying in the following cases?


that cancellation of his debt to the corporation was the equivalent of cash and constituted "other property or money"


You aren’t listening. I’ve addressed this once. First and foremost, do you not see that the phrase “other property or money” is really two separate categories of property??? It is one category known as money (which is property) and another category known as ‘property other than money’ (which is also property). So, when the judge says, “I think it was money or property other than money,” the judge doesn’t tell us which one it is. So, to quote such a sentence in support of your argument is kind of silly. Second of all, the judge doesn’t say the debt cancellation was cash. He says it was “the equivalent of cash.” Third of all, if you’ve ever seen a GAAP financial statement, where debt is exchanged for stock, it shows up as a non-cash investing/financing activity. This leads me to my fourth thing: The guy got something in exchange, which is Nilodop’s point.

All in all, you really need to do some research on COD history/theory.


A loan can't be deemed paid off when it's forgiven, therefore the cash can't make its way over to the creditor and then back to the debtor in a deemed series of transactions?

That’s right. Why would it be deemed paid off if it wasn’t? If it would be deemed paid off, then you could never have COD income. And that would make us wonder why the Tax Code has various provisions relating to COD income. Why would the Tax Code include such provisions if it was impossible for a loan to ever be forgiven?

The financial position of the charity improves by an identifiable dollar amount


Now you’re getting it…”an identifiable dollar amount.”

Even if the only actual event was the "signing of several pieces of paper,"


I’d say that when the judge uses such insulting language, he doesn’t believe these pieces of paper had any substance to them.

If the Tax Court never said such a thing, then what are they saying in the following cases?

In this case, the profit-sharing trust did not forgive or release petitioner's obligation to repay the loans;

Well, the judge is saying exactly what I’ve been saying: If the debt is paid-off/satisfied, there is no forgiveness. When the debt is paid-off/satisfied, constructive transfers are fine. When the debt isn’t paid off, constructive transfers do not fly…because those constructive transfers (resulting in the debt being paid off) do not mirror reality (debt wasn’t paid off, but was instead forgiven). But I do admire your idea that all debts are paid off and never forgiven. My credit score just went up 1,000 points. Anyway, as the judge said in the Caton case that you so nicely presented:

In this case, the profit-sharing trust did not forgive or release petitioner's obligation to repay the loans; petitioner in effect paid his debt. Petitioner offset the amount of his liability to repay the loan (either as the debtor under the notes or as a fiduciary of the trust) against the amount of his benefit in the profit-sharing trust.

Pretty much verbatim what I’ve been saying all along about constructive transfers. Also, I’d say that when the judge uses the word “discharge” in the material you excerpted, he clearly means “satisfied/paid-off” and not “forgiven,” in light of the italicized quote directly above. Further, when the judge says, “petitioner in effect paid his debt,” I’d say that he actually did pay his debt. Not sure why the judge used the words “in effect.” Maybe he wanted to emphasize that no physical cash changed hands, I’m not sure.
 

#128
Nilodop  
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I was doing some reading for pleasure and I stumbled upon this, in a tax case from late in the past century. I quickly acknowledge that it's not directly relevant to this thread, but I found interesting the disdain that the judge applied to the constructive-payment doctrine.

Petitioner concedes it is a cash basis taxpayer. As such, it may only deduct expenditures in the year paid. See secs. 446, 461; secs. 1.446-1(c)(1), 1.461-1(a)(1), Income Tax Regs. While a cash basis taxpayer must include in income amounts actually or constructively received during the year, see sec. 451 and sec. 1.451-1, Income Tax Regs., there is no such provision for constructive payment. It is now horn-book law that "constructive payment" is not a necessary corollary of "constructive receipt," and what may be income to one may not be a deductible payment by the other. See Citizens Fed. Sav. & Loan v. Commissioner [Dec. 22,977], 30 T.C. 285 (1958); William J. Lemp Brewing Co. v. Commissioner [Dec. 19,050], 18 T.C. 586 (1952); Vander Poel, Francis & Co. v. Commissioner [Dec. 15,628], 8 T.C. 407 (1947); Sandoval v. Commissioner [Dec. 36,397(M)], T.C. Memo. 1979-430; 2 Mertens, Law of Federal Income Taxation, sec. 10:33.50, at 80 (1991 rev.).
 

#129
Chay  
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Nilodop wrote:I found interesting the disdain that the judge applied to the constructive-payment doctrine.

Let me be the first to say that I messed up back in #38 by introducing the phrase "constructive contribution," and again in #61 with the term "constructive payment." After researching these concepts more, I've discovered that "constructive payment" is bogus and also completely inapplicable to deemed cash transfers via loan forgiveness. This type of transfer is considered an "actual" payment for tax purposes because the payee actually has the money in hand after the series of deemed transfers takes place.
 

#130
Chay  
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Anyways, here's my response to posts #126 and 127. The three less-important parts about the "ownership theory" are at the top:

Jeff-Ohio wrote:If you really did lend the entirety of your real estate to someone, inclusive of all rights attendant thereto, then they could sell it or even bulldoze it. But let me guess, your “lease” (not your lending document) didn’t convey those rights. This means you didn’t lend the real estate, although you continue to say you did.

This is a rehash of your #83 argument. It still falls flat because you still haven't given any reasons why we should favor your special definition of "lend" that involves transferring ownership over the normal definition that doesn't.

Fungibility has nothing to do with it. You’re simply conflating a claim to something with actual ownership of that something.

And I say you're simply conflating the ability to exhaust a resource with actual ownership of that resource. What is your reason why we should accept your version of the situation over mine? Why does a lender's consent to the exhaustion of their property, so long as the equivalent of that same property is eventually returned, constitute a transfer of ownership? It doesn't, apparently, in the case of non-cash property, according to the dictionary. Why should it for cash?

What you really don’t understand is the modern theory of COD income and how and why the accounting period concept applies to it. That concept severs the cash string that you are so tightly holding onto.

Alright, so how does that work?

But anyways, assuming arguendo that you're right about all that...

Nilodop wrote:the phrase "cancellation of indebtedness" is used loosely.

Interesting. Please tell us more about your theory of "loose" debt cancellation and how it is distinct from...what would you call the opposite? "Strict" debt cancellation? How do I grant "loose" debt cancellation? Why can't I grant it to a charity?

And in each of these, the question of cash or property was not at issue in the sense that it is under 170.

Where were you with this observation when Jeff was assailing me with Rev. Rul. 58-262 and Commissioner v. Kellogg? He used these sources to support his view that debt cancellation is noncash for purposes of section 170. You should have jumped to my defense back then, because "the question of cash or property was not at issue in the sense that it is under 170." Should we comb through this thread and invalidate all sources that didn't directly address the question of cash or property in the context of section 170? That would leave us with exactly nothing to go on, since no one has been able to turn up anything where that question was at issue.

But let's say we did that for argument's sake. No more revenue rulings, no more case law, no more accounting principles and no more dictionary definitions. All of it wiped away because it fails to interpret the phrase "cash, check, or other monetary gift" within the context of section 170. All we're left with is Treas. Reg. § 1.170A-15(b)(1), which is, so far as I can tell, the only instance of any authoritative source addressing what we mean when we say "cash" for purposes of section 170. The Reg. provides that a monetary gift includes "a gift card redeemable for cash," and section 7701(c) tells us that it includes other, similar items as well. A gift card isn't something anyone would call "cash," but it's just as good as cash in the eyes of the government as long as it guarantees the availability of a certain amount of cash. Know what else does that? The forgiveness of an obligation to repay.

With your strict standards, the above is all there is to argue about. I don't think you'll be very successful. But then again, I also don't foresee much success in an attempt to argue that a dollar amount that the Tax Court agrees is the "equivalent of cash" is not also "monetary" without invoking your out-of-context rule. If you still insist my position is wrong, your only avenue will be to seize on the "gift" part of "monetary gift" and argue that a debt forgiveness can't be the "equivalent of cash" when it happens as a gift. That's what Jeff is trying to do anyways, so let's see how that turns out.

Jeff-Ohio wrote:So, when the judge says, “I think it was money or property other than money,” the judge doesn’t tell us which one it is.

True. But the judge does tell us which one it is immediately before he says that. It's as if the judge said: "the four equal lines were the equivalent of a square and constituted 'squares or other parallelograms' within the meaning of geometry." Now, you come in and say "Aha! The judge didn't say it was a square when he said it was a 'square or a parallelogram other than a square'." You are ignoring the fact that he also said it was a square, and it's a pretty goofy argument.

Second of all, the judge doesn’t say the debt cancellation was cash. He says it was “the equivalent of cash.”

A check, a money order, and a credit card payment are all the "equivalent of cash." Clothing is not "the equivalent of cash," despite what you may say. For charitable donation purposes, we put all of the "equivalents of cash" on one line and we don't get an appraisal. We put all the other property like clothing on a different line and we do get an appraisal when needed. So, when you point out that the debt cancellation was "the equivalent of cash," it sounds to me like you're saying I'm right.

Third of all, if you’ve ever seen a GAAP financial statement, where debt is exchanged for stock, it shows up as a non-cash investing/financing activity.

And why does GAAP matter in the slightest for tax purposes?

The guy got something in exchange, which is Nilodop’s point.

All of the taxpayers in these cases used debt discharge as a medium for the payment of a monetary amount. Is it your position that taxpayers are ineligible to use a debt discharge in this fashion when they receive nothing in return, such as when making a gift?

If it would be deemed paid off, then you could never have COD income. And that would make us wonder why the Tax Code has various provisions relating to COD income. Why would the Tax Code include such provisions if it was impossible for a loan to ever be forgiven?

So, based on this, it seems like your position is that when a taxpayer makes a gift via cancellation of a note receivable, the resulting income should be considered COD income and taken into account under the debt discharge rules. Is that correct?

I’d say that when the judge uses such insulting language, he doesn’t believe these pieces of paper had any substance to them.

Right, and they had no substance because the organization was not benefited or enriched, not because they were pieces of paper that were signed. If there was an enrichment, the judge would have used different language because the signing of the paper would have constituted a legitimate transaction.

When the debt is paid-off/satisfied, constructive transfers are fine. When the debt isn’t paid off, constructive transfers do not fly

And what do you propose as the dividing line between debts that we should consider "satisfied," resulting in cash treatment, and debts that we should consider "forgiven," resulting in non-cash treatment?

Pretty much verbatim what I’ve been saying all along about constructive transfers. Also, I’d say that when the judge uses the word “discharge” in the material you excerpted, he clearly means “satisfied/paid-off” and not “forgiven,” in light of the italicized quote directly above.

Right, and I agree with what you've been saying about constructive deemed transfers, including this, except insofar as you maintain that an "equivalent of cash" doesn't count as cash and that constructive deemed transfers don't apply to section 170.

Further, when the judge says, “petitioner in effect paid his debt,” I’d say that he actually did pay his debt. Not sure why the judge used the words “in effect.” Maybe he wanted to emphasize that no physical cash changed hands, I’m not sure.

I agree with you here as well, and I think the judge was drawing a distinction between form and substance with her words. The form of the transaction was debt discharge, but the substance of the transaction was payment of the debt with funds from the trust. That effect is controlling for all tax purposes.
Last edited by Chay on 25-Oct-2019 9:37pm, edited 1 time in total.
 

#131
Nilodop  
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Nilodop wrote:
the phrase "cancellation of indebtedness" is used loosely.

Interesting. Please tell us more about your theory of "loose" debt cancellation and how it is distinct from...what would you call the opposite? "Strict" debt cancellation? How do I grant "loose" debt cancellation? Why can't I grant it to a charity?

It's not the debt cancellation that's loose. It's the use of that phrase to describe what happened in the facts of the several cases listed that's loose. They were exchanges.

Where were you with this observation when Jeff was assailing me with Rev. Rul. 58-262 and Commissioner v. Kellogg?
. Im guessing Jeff-Ohio can answer that concern pretty easily.

All of the taxpayers in these cases used debt discharge as a medium for the payment of a monetary amount. Is it your position that taxpayers are ineligible to use a debt discharge in this fashion when they receive nothing in return, such as when making a gift?
. That's addressed to Jeff, but as for me, Give me liberty or wait, I meant to say yes, that's my position. Having debt discharged is not paying it, with a medium or otherwise.

This type of transfer is considered an "actual" payment for tax purposes because the payee actually has the money in hand after the series of deemed transfers takes place.
. And before as well.
 

#132
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it still falls flat because you still haven't given any reasons why we should favor your special definition of "lend"

I don’t have a special definition of lend, you do. You’re the one saying the real estate is being lent.

And I say you're simply conflating the ability to exhaust a resource

The lessee doesn’t have the ability to exhaust the entirety of the real estate resource, because he wasn’t granted all the rights to exhaust.

Maybe look it at this way Chay, the lender is selling the cash to the borrower on an installment basis. Does that help?

It doesn't, apparently, in the case of non-cash property, according to the dictionary.

Of course it doesn’t, for the reasons already explained. When you give the cash, you grant all rights to it. When you grant one limited right in real property, you haven’t done the same.

How is a "cash string" different from an ownership interest?

How having real estate as collateral for a loan receivable different than owning the real estate outright and in fee simple?

He used these sources to support his view that debt cancellation is noncash for purposes of section 170.

In the case of the RR, I said a judge would put 2 and 2 together. Especially when confronted with the truth: debt forgiveness does not involve actual cash transacted in the current year, nor does it involve constructive cash transacted in the current year (as has been shown). And if it’s not cash, and if the IRS gives us a deduction equal to the value of the note, a judge would highly likely (100%) say that the “forgiveness of indebtedness” charitable deduction is a non-cash contribution.

But then again, I also don't foresee much success in an attempt to argue that a dollar amount that the Tax Court agrees is the "equivalent of cash" is not also "monetary" without invoking your out-of-context rule.

It could very well be monetary indeed…but just in a prior period. That’s why the COD rules don’t go so far as to say, “The asset you got in the prior period IS the exact thing you are taxed on now.” Rather, the COD income you have in the current period is an amount equal to the basis you got in a prior year. The COD income’s connection to the prior basis received is a loose one. I’ve already told you to look at the language in sec 61 and 108.

But the judge does tell us which one it is immediately before he says that.

No he didn’t. I’ll be the first to admit that non-cash COD income could be described a cash equivalent. The non-cash income you have now, in terms of dollar amount, is equivalent to the cash you got in a prior period. Big deal.

So, when you point out that the debt cancellation was "the equivalent of cash," it sounds to me like you're saying I'm right.

Only if you’re saying “the equivalent of cash” IS cash…which I don’t think you are. Again, current year COD income arises from taking the debt off your books. We attach a dollar amount to that. That dollar amount hits your 1040. It’s the equivalent of the same dollar amount of cash wages, or gambling winnings, for example. But, importantly, the COD is not cash. It’s just expressed in dollars.

And what do you propose as the dividing line

I propose it is the same dividing line that exists under current law. If constructive cash transactions can adequately mirror reality, fine by me.

you want us to believe that COD income is cash income. Sorry, but it’s not. While $100 of COD income might equal $100 of cash income, the COD income isn’t cash.

and that constructive deemed transfers don't apply to section 170.

I never said that as an across the board proposition. I’ve only said it in relation to forgiveness and in relation to your preposterous theory. Consider a charity that owes $1,000 in Rent. A friendly donor pays the bill. The fiction is, cash went to the charity from the donor and the charity paid the obligation. Donor gets a cash charitable deduction and charity’s obligation was satisified. That’s how constructive cash transactions work. We have all of the necessary elements to make it so: Cash transacted in the current year and the obligation was paid.

And why does GAAP matter in the slightest for tax purposes?

Why wouldn’t it? This isn’t like some technical thing where we might have a tax/book difference. It’s more like a real basic question: Is the transaction cash or non-cash?
 

#133
Chay  
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Regarding the "ownership" problem...

Jeff-Ohio wrote:I don’t have a special definition of lend, you do. You’re the one saying the real estate is being lent.

Ok, let's talk about my definition. It's from post #84: to give for temporary use on condition that the same or its equivalent be returned. You claim that this definition cannot be applied to real estate and it also cannot be applied to cash; I claim that it can.

The reason I called your definition of lend "special" is that the definition I'm using is the top definition provided on merriam-webster.com. Presumably, that should make it prominent or wide-ranging somehow in its application; in other words, we should list what it can't be applied to as exceptions rather than trying to enumerate all the many things it can be applied to.

Do you agree that the top definition of "lend" is generally applicable? If not, why not, and what is the true "general" definition of "lend" in your opinion? If you do agree, then what are the exceptions to the definition and why?

The lessee doesn’t have the ability to exhaust the entirety of the real estate resource, because he wasn’t granted all the rights to exhaust.

That's true, but it's also irrelevant. We weren't talking about real estate in that part of the post, we were talking about cash and other fungible resources.

You told me that a claim to something does not imply ownership over that thing. This, of course, begs the question: what is ownership?

I'm sure you would agree, as a starting point, that to fully own something implies that I have the exclusive right to do as I please with it and to prohibit someone else from taking any action towards it. But what about situations where my rights are limited? Suppose I gradually divest myself of all of the "strands" included in my "bundle" of property rights, as it was put in Andrus v. Allard, 444 U.S. 51 (1979). At what point have I lost ownership? Which is the crucial strand that tilts the balance?

I say it's my right to reclaim the asset. What's done while the asset is out of my possession doesn't matter. The asset may be demolished and reconstituted a hundred times over, but by the terms of my agreement I still look forward to a resumption of full rights thereto, just as it was before. What I granted was a mere temporary use on condition that the same or its equivalent be returned, not ownership.

So no, it's not a claim to something that implies ownership. It's the right to reclaim something already owned that maintains an ownership interest, however limited, while that thing is not physically possessed.

You say when you give the cash, you grant all rights to it, just as if the lender is selling the cash to the borrower on an installment basis. So, perhaps you agree with me that a right to reclaim implies ownership, and you simply disagree about whether the cash lent out is the same "thing" as the cash returned. Is that where we stand?

And either way, what is your reason why we should accept your version of the situation over mine?

But anyways, all of that notwithstanding...

Nilodop wrote:It's not the debt cancellation that's loose. It's the use of that phrase to describe what happened in the facts of the several cases listed that's loose. They were exchanges.

I see...so when there's a debt cancellation in exchange for something, that counts as a "loose" usage of the phrase "debt cancellation"? And I suppose that means it's really not a debt cancellation in substance, but rather a deemed cash transfer?

You did agree that payment of a monetary amount can be done by way of debt discharge (provided something is received in return), so I guess that's what you were saying before too.

What about you, Jeff-Ohio? You didn't answer my question about using debt discharge as a payment medium. You seem to agree that I can pay someone that way when there's an exchange involved. Does that extend to an exchange of money for services, such as when I pay a salary? If so, should the salary count as cash received in the current year, or do I have to apply special rules related to COD income and/or payments in kind?

Now let's say I have some cash I want to give to someone, but there's no exchange. It could be a donation, a bequest, maybe even a distribution of profits. This person happens to owe me money in a bona fide lending arrangement. Is there a tax principle that prevents me from applying the cash against the loan balance and treating it as if I had actually paid the cash to them? Must COD treatment apply in these instances?

Jeff-Ohio wrote:In the case of the RR, I said a judge would put 2 and 2 together.

Yes, and that had the potential to be a decent argument even though your source was only one half of the equation. That was my point: it's reasonable for us to draw conclusions involving sources that don't directly address the issue of contest.

It could very well be monetary indeed…but just in a prior period. That’s why the COD rules don’t go so far as to say, “The asset you got in the prior period IS the exact thing you are taxed on now.”

We weren't discussing "COD income" in that part of the post, apparently, according to Nilodop, because the phrase "cancellation of indebtedness" is used loosely in the examples at issue. I gather this means that none of the COD rules apply, including the above.

So what we've got in these examples is "the equivalent of cash," which you agree could very well be monetary, considered to be actually paid in the current period under a deemed transfer via debt discharge. The sole point of contention seems to be whether or not the same type of transfer can happen via gift. Right?

But the judge does tell us which one it is immediately before he says that.

No he didn’t.

First he said cancellation of his debt to the corporation was the equivalent of cash, then after that he said the cancellation constituted 'other property or money' within the meaning of section 112(c) (1) of the Revenue Act of 1928. Your claim is that because he said the second thing, he didn't also say the first thing. Sorry, but that's a goofy claim.

So, when you point out that the debt cancellation was "the equivalent of cash," it sounds to me like you're saying I'm right.

Only if you’re saying “the equivalent of cash” IS cash…which I don’t think you are. Again, current year COD income arises from taking the debt off your books.

Again, I don't think we're really talking about COD income in a "strict" sense. It's Nilodop's "loose" version which isn't really COD income, meaning section 108 doesn't apply.

I propose it is the same dividing line that exists under current law. If constructive cash transactions can adequately mirror reality, fine by me.

So are you saying that "mirroring reality" is the dividing line? In other words, if considering a debt "satisfied," resulting in cash treatment, mirrors reality, then that's how it should be treated? And if that arrangement doesn't mirror reality, the debt should be "forgiven," resulting in non-cash treatment?

And why does GAAP matter in the slightest for tax purposes?

Why wouldn’t it? This isn’t like some technical thing where we might have a tax/book difference. It’s more like a real basic question: Is the transaction cash or non-cash?

Ok, I concede this point. We want to know if something can be called "cash, check, or other monetary gift." The only direct source, Reg. § 1.170A-15(b)(1), provides a non-exhaustive list. So, we should fill in the blanks using concepts from outside the Tax Code, such as from accounting or economics.

In a GAAP financial statement, a stock repurchase via debt cancellation is considered non-cash. So that's a point against me. But we still have all these judges saying what we really have is a series of two deemed "cash equivalent" transfers. I'll bet those don't show up on the statement of cash flows...and maybe that's because GAAP is a bit more concerned with form over substance than tax law?

So, it still seems like I come out slightly ahead here. And further, I think I'll follow your lead and look outside the Tax Code for the meaning of "cash" and "monetary." I wonder what someone who prioritizes substance over form would say...
 

#134
Nilodop  
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I see...so when there's a debt cancellation in exchange for something, that counts as a "loose" usage of the phrase "debt cancellation"?. You mean like when I pay off my debt in full using my cash? That's not what section 61 means by "discharge of indebtedness" nor is that a cancellation of debt that triggers income. Under the law (IANAL) I'd guess it's a payment of debt that fulfills the contract that created the debt.

And I suppose that means it's really not a debt cancellation in substance, but rather a deemed cash transfer?. Nope, it's a payment of the debt, both in form and substance, and it's actual, not deemed.
 

#135
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I say it's my right to reclaim the asset.

If you lease your real estate for 3-years, you don’t have a right to reclaim your real estate. And that’s because you never transferred it.
It's the right to reclaim something already owned that maintains an ownership interest, however limited, while that thing is not physically possessed.


It falls flat. If I sell my real estate to you on a non-recourse, seller-financed, basis, with the real estate acting as the collateral, that means I have a right to reclaim the real estate (but only if you don’t pay, mind you). Under your new reclamation theory, that means I still own the real estate. I’d say the buyer would have a real problem with your theory.

You continue to attempt to draw parallels between apples and oranges. You want to compare “lending” real estate to lending cash. It’s a phony comparison. If you really wanted to compare the situations, you would compare:

A $100k cash loan, wherein $100k of cash is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange; to
A $100k sale of real estate, wherein $100k worth of real estate is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange.

That is the proper comparison. And I’ve mentioned it more than once. What you have in the case of the real estate is a sale, which is the only way to transfer the entirety of the bundle of rights.

Your claim is that because he said the second thing, he didn't also say the first thing. Sorry, but that's a goofy claim.


That’s not what I said. What I said, and what I’ve said throughout, is that “equivalent of cash” isn’t the same thing as cash. It’s not actual cash and it’s not deemed cash (even though we might describe it as an amount that is equivalent to $X of cash). The debate ends there. I simply made the further point that the judge’s continued comment was meaningless for our debate, yet fine for the issue in that case, given that the item only needed to fit into one category or the other in that case.

In terms of the “loose usage” issue, the word “discharge” could mean you paid off a debt or it could mean the debt was forgiven. In both cases the debt goes away. You just have to review the context to see which one is at play. Of course, you don’t have Discharge of Indebtedness income when discharging a debt via full repayment. Likewise, if someone discharges their duties faithfully, they won’t get in trouble, since that means they discharged their duties in the way they were supposed to.

So, it still seems like I come out slightly ahead here.

C'mon Chay - Only in your Fantasy World. The idea the lender has retained ownership of his cash is stupid. Once that string is severed, which it was a long time ago, you lose. Your latest Reclamation Theory of Ownership is just you twisting and turning, trying to maintain a firm grip on your thin and stubby cash string. End result is that no cash was actually given or constructively given in the current year.
 

#136
Chay  
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Jeff-Ohio wrote:
I say it's my right to reclaim the asset.

If you lease your real estate for 3-years, you don’t have a right to reclaim your real estate. And that’s because you never transferred it.

My claim, which you quoted, is that in the context of a lack of physical possession, the right to regain physical possession of an asset is what maintains ownership.

In your claim, you are using the word "transferred" to mean "transfer ownership," just like you did in #113 and #117. So, your point is that I cannot regain ownership of real estate which I've put on lease because I never transferred ownership of it.

In making this claim, you have completely failed to address my points. I gave you my take on ownership, asked you for yours, and then challenged you to support why we should favor your definition over mine. Instead, you declare that if I still have ownership over something, I can't lose ownership over it. You're avoiding the issue and again begging the question of what "ownership" is.

If I sell my real estate to you on a non-recourse, seller-financed, basis, with the real estate acting as the collateral, that means I have a right to reclaim the real estate (but only if you don’t pay, mind you). Under your new reclamation theory, that means I still own the real estate. I’d say the buyer would have a real problem with your theory.

If, as I say, the "right to reclaim" is "ownership," then a "conditional right to reclaim" means "conditional ownership." You own the property, but only if a certain set of facts unfolds. We're not discussing a conditional ownership situation in either the OP's facts or in the questions I've posed to you; we're discussing actual ownership in a lending/leasing/borrowing situation.

Now you might use the fact that a "conditional right to reclaim" even exists to attack my idea that a right to reclaim implies ownership. How can that be the deciding factor in a case where the right is uncertain? In response, I would point out that your conception of ownership, which appears to be centered on the right to exhaust or destroy property, is equally useless in a collateralized sale of real estate. By the terms of the sale agreement, neither party can demolish the building. So we are at an impasse here. Clearly, the discussion doesn't apply to all complex forms of ownership; what it does apply to is an uncollateralized lending/leasing/borrowing situation, and that's what it should stay centered on.

If you really wanted to compare the situations, you would compare:

A $100k cash loan, wherein $100k of cash is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange; to
A $100k sale of real estate, wherein $100k worth of real estate is advanced, including all rights therein, and a $100k Note Receivable is taken back in exchange.

In your first example, cash goes out and cash comes back in.

In your second example, real estate goes out, but cash comes back in exchange. In my analogy, it's real estate for real estate.

So how is your analogy better than mine? I'm saying we've got apples for apples on the one hand and oranges for oranges on the other, and I want to know what makes the apples and oranges so different that you can't say you own the apples in between but you can say you own the oranges. We all know that apples and oranges are different things, but why are they different in that particular sense?

Your protest to the question, copied above, is that "oranges for oranges" should really be "oranges for apples." It doesn't make much sense to me, and I think the question remains valid.

The idea the lender has retained ownership of his cash is stupid. Once that string is severed, which it was a long time ago, you lose.

So the idea is wrong because 1) it's "stupid" and because 2) "that string is severed"? You're essentially saying there is no longer any ownership interest in the cash because 1) you know what ownership means and I don't, and 2) ownership doesn't apply to cash that's been lent. You are once again begging the question, which now appears to be your preferred method of argument. If you're so in tune with the meaning of "ownership," then why don't you simply define the term and show why we should favor your version over mine? Twice I've asked, and twice you haven't answered.

It looks like we're getting nowhere fast with your approach to the "ownership" issue, and I'd like to move past that and focus on the "deemed transfer" issue anyways. That would involve you answering the questions I asked in #133. So how's this: if you can't or won't engage with the "ownership" points I've raised here and at the beginning of #133, I'll take your side of the argument. In my next post, I'll put forward the best possible answer you could have to support your version of ownership. It's a very good one. I'll also explain what my response would be and why the question ultimately turns on the deemed transfer issue.

Either way, please look at those deemed transfer questions in #133. I'm having a hard time understanding what your position is regarding deemed transfers. I don't know where we agree and where we disagree, and so I don't yet know how to approach the arguments I'm going to make.
 

#137
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My claim, which you quoted, is that in the context of a lack of physical possession, the right to regain physical possession of an asset is what maintains ownership.


Yeah, see, this stuff about “physical possession” - What does it matter if you never relinquished all your rights?

So far, out of your mouth has come a dominion and control argument (or some partial version)…”transferring” the money, but not giving up ownership of the lent money…giving up “physical possession” of the money and that’s it. Telling us why constructive cash payments have occurred, when all the case law says they haven’t.

You invite us to walk with you to help understand and flesh out the ownership issue as it relates to Cash, based on your phony real estate parallel, which isn’t even parallel.

You can take that walk yourself. To everyone else, it’s pretty easy to understand.

Further, if you didn’t give up ownership, then why does a Note even exist? Why would the “receiver of the money” sign a document saying he’ll pay you back if you never gave him anything, or, if he was merely holding ‘your money’ as an agent?

Makes no sense.

You're avoiding the issue and again begging the question of what "ownership" is.


I already told you ownership entails a bundle of rights. And you haven’t transferred all those when you “lend” your real estate. Which is something else I already told you. And see above.

Enough with your bogus argument about transferring cash to a “borrower” who wants it, who needs it, who controls it, etc…but he doesn’t get ownership over it. You would be laughed out of the courtroom if you tried this nonsense.

I would point out that your conception of ownership

My concept of ownership is exactly as the Tax Law would have it, which entails which party bears the benefits and burdens of the property in question. You’re acting like you can lend cash, but you still own it, so you still enjoy the benefits and suffer the burdens. That’s silly. We all know the borrower enjoys the benefits and suffers the burdens. If the borrower couldn’t enjoy the benefits, then why in the hell would he borrow in the first place?

So how is your analogy better than mine?


Because mine compares apples to apples – the transfer of all rights in the cash to the transfer of all rights in the real property. Any other comparison is fake and phony. And you use your phony comparison as support for your phony theory…acting like Chay is the only person in the world who understands how cash ownership works.

And let me remind you: If you, as the lender, really do own the cash then guess what…THE BUSINESS BORROWER GETS ZERO TAX DEDUCTIONS WITH THE CASH THE BORROWER BORROWED FROM YOU AND THEN SPENT. THIS IS BECAUSE IT’S NOT – AND NEVER WAS - THE BORROWER’S MONEY, PER YOUR THEORY, IT IS STILL THE LENDER’S MONEY FOR TAX PURPOSES.

Also let me remind you: If we accept your theory, that means the charity is your Agent, which it isn’t.

Also let me remind you: If we accept your theory that you still own the cash, it’s double counting, since you also hold a Note Receivable.

It doesn't make much sense to me, and I think the question is valid.


I know it doesn’t…but only to you. You’re the only one here that has trouble understanding that a lease does not convey all rights in real property.

if you can't or won't engage with the "ownership" points


I have sufficiently engaged with your stupid points about ownership. Your concept of ownership doesn’t comport with the tax law. Your concept of ownership hinges on a phony comparison to a real estate lease. Your concept is such that you give the borrower the money, but you haven’t given up anything. I hereby dispute that silly claim.

Either way, please look at those deemed transfer questions in #133. I'm having a hard time understanding what your position is regarding deemed transfers.

Does that extend to an exchange of money for services, such as when I pay a salary?


I really don’t know what the heck you are saying. Are you asking if you exchange money for services is there a deemed transfer? I’d say that’s an actual transfer.

Are you asking if an EE gets a $200 loan from his employer, and then the EE “works it off” by providing services worth $200 to the ER, so as to satisfy the debt, do we have a deemed transfer of cash wages from the ER to the EE, with the EE then repaying the loan? Yeah, sure. That’s fine. The debt was satisfied.

You seem to have real trouble with the idea that the courts won’t cast a forgiveness situation akin to, or as, a repayment situation. Go take that up with the courts. To me it makes complete sense.
 

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