What Happens If The Debt Discharged Is More Than The Amount By Which The Taxpayer Is Insolvent?
In this case, the taxpayer will have to recognize income by the amount of debt discharged that exceeds the amount by which the taxpayer is insolvent. For example: G has a debt of $100,000 and cash of $50,000. Before the debt discharge, G is insolvent for $50,000. G makes a deal to settle $80,000 of the debt for $20,000. G will recognize $10,000 in discharge of debt income because the $60,000 debt discharged ($80,000 – $20,000) exceeds the amount by which G is insolvent ($50,000) by $10,000.
Related Questions
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