POSTS-124403-21 5
application submitted to the PPP lender, Taxpayer X failed to include all relevant facts
that would indicate that she was not eligible for a qualifying forgiveness of the PPP loan.
Based on the omissions and misrepresentations on that application, Taxpayer X
received forgiveness of her PPP loan from the lender.
Law and Analysis
There is no accession to wealth under section 61(a) upon receipt of PPP loan proceeds,
as the PPP loan is issued by a bank, includes an interest rate and maturity date, and
includes an obligation for the eligible recipient to repay. See Commissioner v. Tufts,
461 U.S. 300, 307 (1983); Commissioner v. Indianapolis Power & Light Co., 493 U.S.
203, 207-8 (1990). Once a participating lender forgives a loan originated under the
PPP, however, the recipient of the loan proceeds enjoys an accession to wealth in the
amount of the loan that is forgiven. Under general principles of Federal income
taxation, the amount forgiven must be included in the loan recipient's gross income.
However, section 636m(i) of the United States Code, Title 15, and § 276(b)(1) of the
CTRA 2020 provide express exceptions to the rule that forgiveness of a PPP loan
constitutes gross income.
Thus, a taxpayer who received a PPP loan that is forgiven may exclude the forgiven
amount of the PPP loan from gross income if the forgiveness is described in section
636m(i) and § 276(b)(1) of the CTRA 2020. These exclusions apply only to a qualifying
forgiveness of a PPP loan. Forgiveness of a PPP loan is a qualifying forgiveness only if
the use of the loan proceeds satisfies the conditions relating to specified costs (as
described in 15 U.S.C. § 636m(b), (d)). To receive a qualifying forgiveness, the loan
recipient must apply for the forgiveness in accordance with the specific procedures set
forth in the statute and associated regulations.
Failure to meet these conditions means that there is no qualifying forgiveness, and thus
the exclusions would not apply to the forgiven PPP loan. As the Second Circuit
concludes in discussing the forgiveness provision of the PPP (15 U.S.C. § 636m) in
Springfield Hosp., Inc., 28 F.4th 403, 424 (2nd Cir. 2022):
[F]orgiveness is neither automatic nor guaranteed. A borrower must apply
for forgiveness, which will only be granted if specified criteria are met,
see 15 U.S.C. § 636m(b)–(d), and the CARES Act places several
additional conditions upon obtaining forgiveness [including that the funds
are “used for statutorily authorized purposes”].
The Court of Appeals for the Second Circuit reversed and vacated the bankruptcy court's decision that
the PPP was a grant program for purposes of section 525(a) of the Bankruptcy Code, an anti-
discrimination provision which applies to government “grants.” The Second Circuit analyzed the PPP to
determine whether the PPP loans were “loans” or “grants” for purposes of the Bankruptcy Code, and
concluded that “[the] forgiveness option, favorable as it is, cannot alter the structure of what a loan
forgiveness program fundamentally is—namely, a program to forgive loans.” 28 F.4th at 424 (emphasis
in original).