Legal Question in Tax Law in Florida

Re: IRC section 108

There are several exceptions to the inclusion of canceled debt in income. They include the cancellation of a student loan for a student required to work for certain employers (resulting in part or all of the debt being forgiven). See IRC sec. 108(f)(1).

This exception, however, does not prevent the inclusion of DOI if the student loan is otherwise discharged, compromised or reduced for any other reason. And there is no �exception to the exception� saying that a discharge occurring when the taxpayer is insolvent or in bankruptcy don�t apply if the debt in question is a student loan.

That being said, I�m confused by part of your question. You say that the debt is being �settled,� but not �discharged.� If the nature of your agreement is to simply reduce or postpone your monthly payments, but you remain liable to repay the full amount at some future date, then there is no discharge, and no DOI to worry about. But if the total amount you owe is being reduced, it doesn�t matter if the agreement for some reason says that it is not being �discharged.� Any reduction in a legally enforceable debt gives rise to DOI (or to a purchase price adjustment in certain other circumstances not relevant here), and thus requires an analysis of whether that DOI is or is not excluded from income by IRC sec. 108. The nature of DOI is that you are economically better off after whatever deal you cut with your creditor, and that improvement in your economic situation is what is recognized as DOI. (This also tells you why DOI is excluded if you are insolvent even after the discharge: it is hard to say that you are �better off� if you are insolvent with or without the debt in question.) I would need to know more about the nature of your dispute with HHS and the nature of the proposed settlement to give you a more definite answer, but I hope this explanation of the mechanics of the rule tells you what you need to know.