Lorissa owes Waterbury State Bank $200,000. During the current year, she is unable to make the required payments on the loan and negotiates the following terms to extinguish the debt. Lorissa transfers to Waterbury ownership of investment property with a value of $90,000 and a basis of $55,000, and common stock with a value of $50,000 and a basis of $70,000. Lorissa also pays Waterbury $5,000 cash, and Waterbury forgives the remaining amount of debt. Before the agreement, Lorissa’s assets are $290,000, and her liabilities are $440,000.
Read and analyze the following authorities and determine how much gross income Lorissa has from the extinguishment of the debt:
Sec. 108.
Reg. Sec. 1.61-12.
Reg. Sec. 1.1001-2.
Julian S. Danenberg, 73 T.C. 370 (1979).
James J. Gehl, 50 F.3d 12 (8th Cir., 1995) affg., 102 T.C. 784 (1994).