Cancellation of Indebtedness Income (CODI)

Practical Law Glossary Item 9-382-3298 (Approx. 3 pages)

Glossary

Cancellation of Indebtedness Income (CODI)

Also known as COD income. Cancellation of indebtedness income (CODI) is income recognized by a borrower when all or a portion of its existing debt is actually cancelled or deemed to be cancelled for tax purposes. Because a borrower does not include loan proceeds in income at the time a loan is made, it must recognize income if all or a portion of this debt is later cancelled.

A borrower may be able to exclude CODI from its gross income under one or more exceptions (IRC § 108(a)(1)), including the:

Bankruptcy exception (for borrowers that discharge debt in a case under the Bankruptcy Code).
Insolvency exception (for borrowers with liabilities in excess of assets).
Qualified real property business indebtedness exception (for borrowers that are not C-corporations).

For more information about CODI, see Practice Notes:

Cancellation of Indebtedness Income.
Loan Buybacks and Loan Amendments: Cancellation of Indebtedness Income for Borrowers.
Restructuring Outstanding Debt Securities: Cancellation of Indebtedness Income for Issuers.
Tax Traps in an Acquisition of a Financially Distressed Target.
Bankruptcy: Overview of the Chapter 11 Process.

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