T borrows $100,000 from the bank in Year 1, which he agrees to repay in Year 2. When the debt becomes due in Year 2, the bank agrees to release T from liability if he pays $80,000. a. T realizes $100,000 of income in Year 1. b. T realizes $20,000 of income from the cancellation of debt in Year 2. c. T realizes $20,000 of ordinary income as compensation for services in Year 2 if the cancellation of debt was intended to satisfy the bank’s obligation to pay T for services. d. Both a and b. e. Either b or c, depending on the circumstances.
T borrows $100,000 from the bank in Year 1, which he agrees to repay in Year 2. When
the debt becomes due in Year 2, the bank agrees to release T from liability if he
pays $80,000.
a. T realizes $100,000 of income in Year 1.
b. T realizes $20,000 of income from the cancellation of debt in Year 2.
c. T realizes $20,000 of ordinary income as compensation for services in Year 2 if
the cancellation of debt was intended to satisfy the bank’s obligation to pay T
for services.
d. Both a and b.
e. Either b or c, depending on the circumstances.
T buys a parcel of real estate for $100,000, which he finances by giving the seller a nonrecourse
mortgage for the full purchase price. The debt is due in one balloon payment in
Year 5. When the debt becomes due in Year 5, T decides to give the property back to the
seller in satisfaction of the debt (the property is worth only $50,000 at that time).
a. T will realize $100,000 of income in Year 1 because the debt was non-recourse.
b. T will realize no income in Year 1, regardless of whether the debt was recourse
or non-recourse.
c. T would realize $100,000 of income in Year 1, regardless of whether the debt
was recourse or non-recourse.
d. None of the above.
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