Reference no: EM132825048

Problem 1: Chuck Brown, a small independent dealer of used cars, forgives $5,000 of the balance owed on a used car sold to Jessica Jones because Jessica experienced a significant amount of mechanical difficulties with the car and Chuck tries to maintain customer satisfaction. Jessica Jones is not insolvent. Which of the following statements reflects the proper tax treatment and classification of this transaction to Jessica Jones?

Option 1: The forgiveness of $5,000 of the balance due is taxable income because "gifts" cannot be inferred on a commercial transaction like this.

Option 2: The forgiveness of $5,000 of the balance due is taxable income because Jessica Jones is not insolvent.

Option 3: The forgiveness of $5,000 of the balance due can be excluded as a seller's price adjustment (seller's forgiveness of debt).

Option 4: none of the above