The Tax Consequences of Debt Forgiveness

FSA 9999-9999-170

Background. A church wants to help its pastor purchase a new home, and so it agrees to pay $50,000 of the purchase price. The pastor signs a promissory note agreeing to pay back the $50,000 in ten annual installments. The church board assures the pastor that the church will "forgive" each annual installment on the date it is due, and so the pastor will not have to pay back anything. Is this transaction legitimate? What are the tax consequences? Church treasurers need to understand the answer to these questions, since this kind of arrangement is common and often misunderstood.

An IRS memorandum. The IRS recently released an internal memorandum (a "field service advisory") that addresses the tax consequences of debt forgiveness. Here are the facts of the arrangement the IRS was addressing. A widow and mother of three adult children owned a partial interest ...