United States: Court Holds Pension Plan Interest Not An Asset For COD Income Insolvency Exception

The Tax Court has held in Scheiber v. Commissioner (T.C. Memo 2017-32) that an individual's interest in a pension plan was not an asset for purposes of determining the extent of his insolvency under Section 108(d).

The case involved an individual and his wife (the Scheibers) who incurred $418,596 of cancellation of debt (COD) income under Section 61(a)(12). The Scheibers took the position that a substantial amount of the COD income was excludable under Section 108(a)(1)(B) because they were insolvent immediately before the discharge under Section 108(d)(3).  Under section 108(d)(3), the Scheibers computed their insolvency by the excess of their total liabilities over the fair market value of their assets.

Mr. Scheiber was retired and was entitled to receive monthly payments from a pension plan at the time of the discharge of indebtedness. The IRS took a contrary position that the Scheibers were not insolvent because they failed to include Mr. Scheiber's interest in a pension plan as an asset. If Mr. Scheiber's interest in the pension plan was included, the Scheibers would not be insolvent relevant to the discharge date.

The Court held that Mr. Scheiber's interest in the pension plan was not an asset within the meaning of Section 108(d)(3). Specifically, the Court held that Mr. Scheiber's pension plan interest was not an asset because: 

• The pension plan interest entitled the Scheibers to only monthly payments.
• The interest could not be assigned.
• The interest could not be borrowed against.
• The Scheibers could not borrow from the plan.