May 3, 2021 10:55 pm

Is an Interest in a Pension Plan as Asset for Determining Insolvency?

The answer to this question determines whether cancelation of debt is or is not taxable. The issue of whether an interest in a defined benefit (pension) plan should be treated as an asset arose in a Tax Court decision several years ago (Schieber, TC Memo 2017-32). In that case, a retired police officer was entitled to receive a monthly pension from the California Public Employees’ Retirement System. The court concluded that it was not an asset—only a right to a monthly payment—because he could not access the funds. He could not convert the interest to a lump-sum cash amount, sell the interest, assign the interest, borrow against it, or borrow from the plan. This holding enabled the taxpayer to be treated as insolvent and exclude the cancelation of debt (a mortgage) from gross income.

Now, the IRS has nonacquiesed in this decision, meaning that the IRS will not follow it (AOD 2021-01).

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Tax Glossary

Partnership

An unincorporated business or income-producing entity organized by two or more persons. A partnership is not subject to tax but passes through to the partners all income, deductions, and credits, according to the terms of the partnership agreement.

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