Discharges of debt are generally taxable. However, in certain circumstances, part or all of the income from a discharge of indebtedness may be excluded. Which of the following concepts form(s) the basis for the income tax treatment of a discharged debt?
I.Wherewithal-to-Pay Concept.
II.Legislative Grace Concept.
III.Realization Concept.
IV.Substance Over Form Doctrine.

Question

Discharges of debt are generally taxable. However, in certain circumstances, part or all of the income from a discharge of indebtedness may be excluded. Which of the following concepts form(s) the basis for the income tax treatment of a discharged debt?
I.Wherewithal-to-Pay Concept.
II.Legislative Grace Concept.
III.Realization Concept.
IV.Substance Over Form Doctrine.
​

Quizplus · Accepted Answer

The Wherewithal-to-Pay Concept, Legislative Grace Concept, and Realization Concept form the basis for the income tax treatment of a discharged debt. The Wherewithal-to-Pay Concept suggests that taxes should be levied when the taxpayer has the means to pay. The Legislative Grace Concept refers to the idea that any tax exemptions or exclusions are a result of specific legislative actions. The Realization Concept indicates that income is not recognized for tax purposes until it is realized, which is relevant in the context of debt discharge. The Substance Over Form Doctrine, while important in tax law, does not directly relate to the treatment of discharged debt in the same way as the other three concepts.

Discharges of Debt Are Generally Taxable