When Rick found out that Ryan's liabilities exceeded his assets by $15,000, he forgave Ryan the $1,000 he owed Rick in hoping that Ryan might get back on his feet. Ryan is allowed to exclude the $1,000 from income.

Question

Quizplus · Accepted Answer

Forgiveness of debt generally results in taxable income for the debtor, but in this case, the forgiven amount is not taxable because it was a gift from Rick and not related to any trade or business. Therefore, Ryan can exclude the $1,000 from his income.

When Rick Found Out That Ryan's Liabilities Exceeded His Assets