Calculating Solvency: A New Development
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In handling discharge of indebtedness for income tax purposes, a highly important question is whether the taxpayer involved is solvent or insolvent. Except for the solvent farm debtor rule, the provision for real property business debt and purchase price adjustment, once a taxpayer becomes solvent, any further discharge of indebtedness produces ordinary income except for taxpayers in bankruptcy. For an insolvent taxpayer, discharge of indebtedness is excluded from income although the taxpayer’s tax attributes and income tax basis of assets must be reduced.