Publication Date

Fall 2022


Tax Law Review


Every year, companies issue hundreds of billions of dollars of debt with a feature carrying unclear tax consequences. So do individuals, who frequently tie their most significant financial asset to this type of instrument. Yet this instrument is not an exotic or innovative financial derivative, but is simple vanilla debt with two or more borrowers, or “co-obligated debt”. Co-obligated debt poses a conceptual problem for the law because it does not fit neatly into the simple and dyadic legal framework underlying the law’s conception of debt, where one creditor lends money to one borrower in exchange for a direct promise to pay the amount borrowed plus interest. Such a framework collapses when the debt instrument has multiple borrowers—as a matter of law or as a matter of fact. As a result, courts and the IRS frequently struggle with the consequences of a transaction, unable to consistently find a resolution to the puzzle: whose debt is it anyway? This Article illuminates the previously unexplored side of this fundamental aspect of the law on debt, investigating its roots in surety, guaranty, and restitution law, and surveys the law’s inconsistent treatment of multiple obligors, emphasizing its erratic stances on interest deductions, cancellation of indebtedness income, and debt modifications. The Article then identifies and categorizes the inconsistencies and shortcomings in these areas of the law, developing a typology of approaches to the issue of who owes co-obligated debt. After tracing the law’s shortcomings, the Article culminates by developing a comprehensive solution to the problem of “ownership” of joint debt, resolving the unpredictability, inconsistency and undesirability plaguing current law. Resolving the puzzle of who owes joint debt not only provides uniformity and predictability to the IRS and the courts’ stances on interest deductions, cancellation of indebtedness income, and debt modifications; but it also further illuminates solutions to legal problems in contiguous areas of the law, such as the sourcing of interest income in some cross-border transactions, challenging certain tax evasion schemes, and finding a more comprehensive definition of “debtor”.



First Page



NYU School of Law


debt, tax, cancellation of indebtedness income, financial instruments, taxation of financial instruments


Bankruptcy Law | Law | Securities Law | Tax Law



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