Significant Modification and Phantom Income

[Bob Malecki]

We are finalizing our new private equity fund to acquire both first and second residential NPLs. Our current tax accountant has provided us info on the phantom income component which can result if performing a "significant modification" to the NPL, which would be a change in rate, term or payment. Essentially as I understand it, the IRS may view the mod as a 'new loan' there is a taxable gain from the cost basis of the NPL to the UPB.

Has anyone explored this and have any comments or resources to clarify?

[Mike Hartzog]

Dan's comment got me thinking that the accountant may be talking about debt forgiveness being a taxable event for the borrower, not a taxable event for the  lender.  That does make sense.  Can you clarify Bob?