Here is the deal looking at it from the lender's side. They wrote off $40K, and will include that loss on their tax return. In other words, it was a business expense that reduces their net profit. So the IRS says: "If you had an expense, did someone else gain?". Well as a matter of fact the borrower gained the $40K they were obligated to pay. So it was technically income to the borrower, even though the money was paid when the borrower originally took out the loan. It magically transformed from a loan to income when the lender wrote off the debt.
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Today's Featured Article - A Cautionary Tale - by Ian Minshull. In the early 1950s my father bought an Allis Chalmers B and I used it for all the row crop work with the mangolds and potatoes, rolling and the haymaking on our farm. The farm and the Allis were sold and I have spent a lifetime working on farms throughout the country. I promised myself that one day I would own an Allis. That time event
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