Choose the correct answer to complete the following sentence. Income from cancellation of debt: Is only...

Choose the correct answer to complete the following sentence. Income from cancellation of debt:

Is only excluded from income if the buyer is insolvent.

Is not excludable from income if the buyer is insolvent.

May be excluded to the extent the buyer has negative net worth.

Is taxable to the extent that the buyer has negative net worth

Expert Solution

Anseer: INSOLVENCY : is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency. Their are two types of insolvency 1) cash flow insolvency. 2) Balance sheet insolvency. 1) firstly cash flow insolvency arises when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment. 2) secondly Balance sheet insolvency occurs when a person or company does not have enough assets to pay all of their debts. In general, if you have cancellation of debt income because your debt is canceled, -the amount of the canceled debt is taxable and you must report the canceled debton your tax return for the year thecancellation occurs. From the above it is concluded that " is taxable to the extent that the buyer has negative net worth"

jeff jeffy answered 2 years ago

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