Points will be awarded for identifying the issues, the law that applies, and a significant percentage of the points awarded will be based on a thoughtful communication of your conclusions and ultimate advice. Please cite any legal or administrative support you utilize to reach conclusions.

John comes to your office on a referral from a business attorney. He is looking to start a used car and truck service business. Because the location he has chosen is rural, John comments that he can get financial assistance from GM (he plans to specialize in GM vehicles) as well as local banks.

In fact, John has started the business by purchasing $100,000 worth of equipment utilizing a loan from a local bank. Assume the equipment is Johns only depreciable property and that, for sake of discussion with John, the value and adjusted basis in the equipment remains at $100,000 (unless otherwise indicated in the question).

John is concerned about the debt load if the business does not perform up to expectations and asks your advice/technical analysis of the following possible outcomes:

1. John has financial difficulties and negotiates with the bank for a loan reduction. The bank agrees and allows the debt to be satisfied for $60,000.
2. Assume John will declare bankruptcy and the $100,000 liability is discharged at a time when the adjusted basis in the equipment (as a result of depreciation) is $75,000.
3. Assume, instead, that John buys the equipment directly from GM (in storage from a dealership that failed) and GM agrees to compromise the $100,000 of debt down to $60,000.
4. Assume John restructures the debt when he is insolvent. At that moment, he will have liabilities of $100,000 and the FMV of the equipment will be $90,000 (with an adjusted basis of $75,000). The bank agrees to discharge $40,000 of the $100,000 liability without any payment.
5. Assume the same facts as in D above. But instead of reducing the debt by $40,000, the bank forces the business into liquidation. Assume further that the debt is recourse to Johns other assets. Rather than forcing payment by John for the full amount of the debt, the bank agrees to settle the $100,000 liability for the value of the equipment which will be repossessed and sold at auction. What tax consequences would occur under these facts?