Ordinarily when a company is released from a debt, it must report the amount discharged as taxable income. The IRS said in an interesting private ruling released in September that one company did not have to do so.

The company had both senior and subordinated debt. The company could not pay both debts currently. The holder of the subordinated debt agreed to release the company from having to repay it. The subordinated debt was purchase price that the company had promised to pay for some assets it purchased. Under a special rule in the US tax code, when a debt owed to the seller of property is reduced, the debtor can simply take the position that it paid less for the property than appeared earlier. This special rule is in section 108(b)(5). The debtor cannot be insolvent or in bankruptcy proceedings when it is released from the debt. The IRS discussed the case in Private Letter Ruling 200336032.