Treatment of forgiveness of debt by the creditor
A hospital corporation loans money to a physician to
establish a practice in a given area. For each year the
physician practices in that area a portion of the debt is
forgiven by the terms of the loan agreement. The physician
obviously has COD income, but can any of you accounting pros
tell me what the treatment of the forgiveness is by the
creditor, the corporation? Is this a current expense, a
capital loss or what? It could hardly be a bad debt since it
it pursuant to a contract.
I am going to assume a "fact not in evidence" in that in
addition to the loan being for the establishment of a
practice in a given area, the loan is also for services
provided or to be provided. That is, the physician is an
employee of the hospital or an independent contractor who
receives compensation from the hospital.
If the physician is an employee of the hospital it is W-2
wages and the hospital has compensation expense.
If the physician is not an employee of the hospital it is
1099-MISC non-employee compensation (also immediately
deductible by the hospital).
See Chief Counsel Advice 200003008 as modified by Chief
Counsel Advice 200130038. These relate to a hospital that
forgave student loans made to a physician in exchange for
services, but the analysis should be similar.
(The original CCA stated that if the hospital was an
"applicable financial entity" (e.g., a hospital operated by
an agency of the federal government, such as a military
hospital), and it discharged indebtedness of a person who
was not an employee of the hospital in exchange for
services, the amount would have to be reported on Form
1099-C per Section 6050P. The second CCA clarified that a
1099-MISC would be filed for a non-employee rather than the
1099-C.)