Rev. Rul. 70-406

Revenue Ruling 67-200, C.B. 1967-1, 15, discussed the treatment of unpaid interest which had been forgiven after being deducted in a prior year by an accrual method taxpayer. That Revenue Ruling holds that any part of the interest forgiven which is not excluded from gross income under section 111 of the Internal Revenue Code of 1954 may be excluded from gross income under section 108 of the Code for the taxable year of forgiveness provided there is filed, in accordance with section 1.108(a)-2 of the Income Tax Regulations, a consent to the adjustment of the basis of the taxpayer's property pursuant to section 1017 of the Code and section 1.1017-1 of the regulations. The Revenue Ruling concludes that an amount of the interest forgiven which is excludible under section 108 of the Code cannot exceed the basis of the taxpayer's property which is being adjusted. Thus, any portion of such amount which exceeds the basis is includible in gross income under section 61(a)(12) of the Code.

Held, the conclusion of Revenue Ruling 67-200 applies equally to corporations and individuals. However, where the taxpayer is an individual, the exclusion provided by section 108(a) of the Code is available only with respect to indebtedness incurred or assumed in connection with property used in his trade or business.

Revenue Ruling 67-200 is hereby clarified.