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Revenue Administrative Bulletin 1989-11

March 31, 1989


RAB-89-11. This Bulletin describes the Michigan income tax treatment of a discharge of indebtedness.

Cancellation of Indebtedness

If a debt owed by an individual is cancelled or forgiven, other than as a gift, then the amount of the cancelled debt must be included in gross income of the individual. Forgiveness of debts owed to a seller/creditor are considered reductions to the purchase price and, generally, are not classified as cancellation of indebtedness.

Michigan Income Tax Treatment

The Michigan Income Tax Act, MCL 206.30(l), defines taxable income as adjusted gross income as defined in the Internal Revenue Code subject to certain adjustments. Therefore, any income arising from cancellation of indebtedness included in federal adjusted gross income is subject to Michigan income tax.

For information regarding the Federal treatment of cancellation of indebtedness, see Section 108 of the Internal Revenue Code. Substantial changes were made to this provision in the Technical and Miscellaneous Revenue Act of 1988.

Michigan Tax Credit Treatment - Household Income

Michigan "household income" is used to determine eligibility for and the amount of tax credits available to Michigan residents. These credits include the property tax credit and the home heating credit. The Michigan Income Tax Act, MCL 206.508(4), defines household income as "all income received by all persons of a household in a tax year while members of a household." (See also Department of Treasury Income Tax Rules, 1979 AC, R 206.4.)

Income, for the purposes of calculating household income, is defined in the Michigan Income Tax Act, MCL 206.510(1), as "the sum of federal adjusted gross income as defined in the internal revenue code plus all income specifically excluded or exempt from the computations of the federal adjusted gross income."

Depending on the circumstances, cancellation of debt may be included in household income in the year the debt is discharged or cancelled. The amount of the cancelled debt is included in household income in the following instances and to the extent that it is: (1) included in federal adjusted gross income, or (2) used to reduce a credit carryover or foreign and United States possession tax credits.

The amount of cancelled debt is not included in household income if it is used to reduce a net operating loss, capital loss, or basis of property. The cancelled or discharged debt in these instances is reflected in household income in a later year as a result of the reduction or loss of the above tax attributes.