When the co-signer on a loan had no cancelation of debt income (COD), a court precedent, detailed below, dictates how federal taxes should treat the funds. 

The Tax Court (F. Bullock, TC Memo. 2017-219) held that a taxpayer did not receive cancelation of debt income (COD) because she was not the primary obligor on the loan that her son and daughter-in-law had taken out. The Court reasoned that her net worth had not increased over what it would have been if the original transaction had never occurred. She was merely a secondary obligor who did not realize until trial that she had unwittingly signed paperwork indicating that she was the primary obligor on the loan. The lender was aware that the taxpayer only intended to be a cosigner, had never contacted her for repayment (although Form 1099-C was issued to her), and that the son and daughter-in-law were responsible for the loan payments.