cancellation of income via debt forgiveness


S

Seth Breidbart

Does it matter what the source of the debt was?

Clearly, if I borrow $1000 and don't have to pay it back,
I'm $1000 better off, so calling it income is reasonable.

What if I accidentally damage someone else's property, so
that I owe him $1000, but he forgives the debt? I'm no
better off (than I was before doing the damage), so is there
income?

Seth
 
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S

Stuart A. Bronstein

Does it matter what the source of the debt was?
I suppose it could.
Clearly, if I borrow $1000 and don't have to pay it back,
I'm $1000 better off, so calling it income is reasonable.

What if I accidentally damage someone else's property, so
that I owe him $1000, but he forgives the debt? I'm no
better off (than I was before doing the damage), so is there
income?
Ah, but you are better off. Because you otherwise would
have had to come out of pocket a non-deductible $1,000. If
the expense would have been deductible I imagine it would be
different.

Stu
 
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M

MTW

Seth said:
Clearly, if I borrow $1000 and don't have to pay it back,
I'm $1000 better off, so calling it income is reasonable.
What if I accidentally damage someone else's property, so
that I owe him $1000, but he forgives the debt? I'm no
better off (than I was before doing the damage), so is there
income?
In the first example you have "basis" in the item received
($1,000 cash). But, in the second case you don't. The
concept here is "debt cancellation INCOME," and in the
latter case there simply isn't any (income, that is).

MTW
 
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V

vineeth

All cancelled debts must be included in your gross total
income. Thus $1000 must be included in your gross total
income. There is a code in IRS which specifically mentions
that all income unless specifically excluded, must be
included in gross income.

With respect to your 2nd situation it's not taxable. The
point behind this is: any income in order to tax must be
both realized and recognized. Thus in this situation u have
neither realized nor recognized any income from the
cancellation of debt, right!

So don't worry and go ahead destroying your neighbors
property :)

(Kidding)

N.Vineeth
Prompt & Secure Outsourcing services
India
www.pnsbpo.com
(e-mail address removed)
 
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D

David Woods, EA, ChFC, CLU

vineeth said:
All cancelled debts must be included in your gross total
income. Thus $1000 must be included in your gross total
income. There is a code in IRS which specifically mentions
that all income unless specifically excluded, must be
included in gross income.
Well hold on here. It is NOT true that all cancelled debt
would be included as taxable income. COD income is not
taxable to the extent the debtor is insolvent.
 
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