Final answer:
A discharge of indebtedness is not included in gross income when the taxpayer is insolvent before and after the debt forgiveness.
Step-by-step explanation:
A discharge of indebtedness is not included in gross income when the taxpayer is insolvent before and after the debt forgiveness (option b). Insolvency means that the taxpayer's total liabilities exceed their total assets. In this case, the discharge of indebtedness is excluded from gross income because the taxpayer does not have the ability to pay the debt.
For example, if a taxpayer owes $20,000 in credit card debt and is insolvent, and the credit card company agrees to forgive $10,000 of the debt, the $10,000 forgiven amount would not be included in the taxpayer's gross income.
A discharge of indebtedness is not included in gross income when the taxpayer is insolvent before and after the debt forgiveness. This is because the insolvency means they cannot afford to pay taxes on the forgiven debt. Other options provided do not automatically qualify for exclusion from gross income.
When considering when a discharge of indebtedness is NOT included in gross income, the relevant circumstance from the given options is b. When the taxpayer is insolvent before and after the debt forgiveness. According to tax law, if a taxpayer is insolvent both before and after a debt discharge, the amount of the debt that doesn't exceed the amount of insolvency is generally not required to be included in gross income. Insolvency occurs when a person's liabilities exceed their assets. Therefore, if the discharge doesn’t bring the taxpayer out of insolvency, they effectively have no capacity to pay taxes on the forgiven debt, and under the Tax Code, such forgiven debts are excluded from taxable income.
Options a, c, and d do not automatically qualify for the exclusion from gross income. Specifically, option d suggests that the taxpayer becomes solvent after the discharge, which typically means they would have to include the discharge in their gross income, as they would then have the capacity to settle their debts. It's also important to clarify that option c refers to a debt settlement arrangement which usually does not result in a complete discharge of indebtedness but rather a reduction, meaning the forgiven portion could still potentially be included in gross income unless another specific exclusion applies.