The downturn in farm commodity prices has focused attention once again on forgiveness of debt or “discharge of indebtedness income.”1 For many practitioners (and many debtors and lenders) it is the first time since the 1980s2 to face significant problems in repaying debt on farm or ranch loans. The rules have remained largely unchanged over the past 25 years. It is important to note that the rules on forgiveness of debt (or discharge of indebtedness) for farm or ranch taxpayers are significantly different from the rules applicable to other types of businesses. In general, if indebtedness is cancelled or forgiven, the amount cancelled or forgiven must be included in gross income as ordinary income.3 However, relief provisions are available, even for solvent taxpayers, under some circumstances.4



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