Question

Which of the following is an exception that allows a taxpayer to exclude cancelation of indebtedness income (pursuant to IRC Section 108) from ordinary income taxation?

A. If the discharge of indebtedness occurs in a Title 11 bankruptcy case.
B. If the discharge of indebtedness occurs when the taxpayer's FMV of assets exceed his or her liabilities. property.
C. If the indebtedness discharged is only secured by investment
D. A and B only.
E. A and C only.

Answer 1

The exception to exclude cancellation of indebtedness income from taxation under IRC Section 108 is if the discharge occurs in a Title 11 bankruptcy case.

Step-by-step explanation:

The exception that allows a taxpayer to exclude cancelation of indebtedness income from ordinary income taxation pursuant to IRC Section 108 is A. If the discharge of indebtedness occurs in a Title 11 bankruptcy case. This exclusion applies because Section 8 Clause 4 of the U.S. Constitution grants Congress the power to establish bankruptcy laws that can provide for the forgiveness of debts. However, option B is not an exception under IRC Section 108 because the exclusion generally applies when the taxpayer is insolvent, meaning their liabilities exceed the fair market value (FMV) of their assets, not the other way around. Indebtedness secured by investment property has particular rules and exclusions, but it is not a general exception. Therefore, the correct answer to the student's question is A.