Discharges of Debt Are Generally Taxable

question 107

Multiple Choice

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.
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• A)Statements I and III are correct.
• B)Statements II and III are correct.
• C)Statements I and IV are correct.
• D)Statements I, II, and III are correct.
• E)Statements II, III, and IV are correct.

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Definitions:

Zero Coupon Bonds

Bonds issued at a discount from their face value, which do not pay periodic interest but are redeemed at full face value at maturity.

Effective Interest Rate

The real rate of interest taking into account the effects of compounding over a given period.

Discount

A reduction from the full amount or value of a product or service, usually to entice customers or accelerate sales.