David owes $120,000 to Second National Bank. David is having financial difficulties during the current year and Second National agrees to reduce David's debt to $80,000 to help him get his financial affairs in order and avoid bankruptcy.
I.If David's assets were $300,000 and his liabilities were $290,000 before the discharge, he is taxed on $10,000 of the $40,000 debt reduction.
II.If David's assets were $300,000 and his liabilities were $400,000 before the discharge, he is not taxed on any of the $40,000 debt reduction.

Question

David owes $120,000 to Second National Bank. David is having financial difficulties during the current year and Second National agrees to reduce David's debt to $80,000 to help him get his financial affairs in order and avoid bankruptcy.
I.If David's assets were $300,000 and his liabilities were $290,000 before the discharge, he is taxed on $10,000 of the $40,000 debt reduction.
II.If David's assets were $300,000 and his liabilities were $400,000 before the discharge, he is not taxed on any of the $40,000 debt reduction.
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Quizplus · Accepted Answer

The Answer of David owes $120,000 to Second National Bank. David is having financial difficulties during the current year and Second National agrees to reduce David's debt to $80,000 to help him get his financial affairs in order and avoid bankruptcy.
I.If David's assets were $300,000 and his liabilities were $290,000 before the discharge, he is taxed on $10,000 of the $40,000 debt reduction.
II.If David's assets were $300,000 and his liabilities were $400,000 before the discharge, he is not taxed on any of the $40,000 debt reduction.
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David Owes $120,000 to Second National Bank