Ben was involved for many years in the development and management of beer halls and pubs. In
Question:
Ben was involved for many years in the development and management of beer halls and pubs. In 2017, Ben began experiencing a significant financial downturn in his business due to the over-supply of beer halls and pubs in his footprint area. As a result, by the end of 2019, Ben was down to owning and managing just one beer hall facility in the OTR area of Cincinnati that he had bought back in 2016 for $5.0 million, having borrowed $4.5 million from Ohio Citizens Bank (OCB) to do so. The 2020 Covid pandemic presented additional financial strains on Ben's business, so that in late 2020, Ben began to negotiate a re-working of the amount of the purchase debt that he had with OCB. Ben was successful in this regard, and in early 2021 OCB did write-down the debt from $4.0 million, its face amount at that time, to $3.2 million, the fair market value of the beer hall facility at the time of the write-down of the OCB debt.
In the meantime, Ben was also looking to sell the beer hall, having by now ceased to manage its operations. In 2022, having seen the value of the beer hall further drop to $3.0 million, Ben, unable to sell the facility, stopped paying on the bank loan he used to acquire the beer hall, even though Ben was otherwise not bankrupt. As a result, the OCB foreclosed on the $3.2 loan, took possession of the beer hall in which the bank held an interest as security for the loan, and, in addition, convinced that Ben would not restart any payments soon, cancelled the remaining loan amount of $200,000.
Ben has engaged you to advise him on the tax consequences of the above events. As part of the engagement, Ben has instructed you that he is not, at the moment, interested in pursuing the insolvency exception to the COD income rule because Ben wants to know what his tax exposure would be before he incurs the cost of valuing his assets, and perhaps also being forced to litigate the issue, and the cost of determining which of his liabilities would count for purposes of the insolvency measure.
Governmental and Nonprofit Accounting
ISBN: 978-0132751261
10th edition
Authors: Robert Freeman, Craig Shoulders, Gregory Allison, Robert Smi