What is Cancellation of Debt?
If a taxpayer borrows money from a commercial lender and the lender later cancels or forgives the debt, that taxpayer may have to include the cancelled amount in income for tax purposes, depending on the circumstances.
When the taxpayer borrows the money he or she was not required to include the loan proceeds in income because that taxpayer had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount received as loan proceeds is normally reportable as income because that taxpayer no longer has an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to the taxpayer and the IRS on a Form 1099-C, Cancellation of Debt.