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Based Upon the Internal Revenue Code, Do You Agree or Disagree with the Following Statement: a Taxpayer Does Not Have to Report Income When Debt Is Forgiven, Because the Taxpayer Receives Nothing. Explain the General

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Based upon the Internal Revenue Code, do you agree or disagree with the following statement: A taxpayer does not have to report income when debt is forgiven, because the taxpayer receives nothing. Explain the general rule, with reference to the applicable section of the Code, and any exceptions to the general rule.

Based on the Internal Revenue Code, I would disagree with the above statement. According to Section 61(a) “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to the following items.” In regards to debt forgiveness, Section 61(a)(12) includes, “Income from discharge of indebtedness”. Therefore, the taxpayer must still report income when debt is forgiven.

Section 108 includes the exceptions to gross income from discharge of indebtedness. Generally speaking, Section 108 (a)(1) references the indebtedness of taxpayer that would not be included in gross income. They include:

A. “the discharge occurs in a title 11 case, B. the discharge occurs when the taxpayer is insolvent, C. the indebtedness discharged is qualified farm indebtedness, D. in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or E. the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2014.” Section 61(a)(1)(A-E)

Title 11 is any case relating to bankruptcy, “…but only if the taxpayer is under the jurisdiction of the court in such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court” Section 61(d)(2)

Another exception includes student loans. According to Section 61(f)(1), “In the case of an individual, gross income does not include any amount which would be includible in gross income by…...

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