The general rule is that income from the cancellation of debt is included in a taxpayer’s gross income. [IRC §61(a)(12)] However, IRC §108 provides various exclusions from income for cancellation of debt if certain requirements are met. One of those exclusions, found at IRC §108(a)(1)(B), provides for excluding from income cancellation of debt to the extent the taxpayer is insolvent at the time the debt is discharged.
The taxpayers in the case of Schieber v. Commissioner, TC Memo 2017-32 argued that they were insolvent at the time GMAC Mortgage had cancelled debt of $448,671. The debt was secured by a piece of property (the Stockdale Highway property) that was not the taxpayer’s principal residence.
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