Take a look at the topic "Canceled Debt" beginning on page 85 within Chapter 12.
Therein, you will alos see some references to other IRS publications, including Publication 525 "Taxable and Nontaxable Income" and Publication 4681 "Canceled Debts, Foreclosures, Repossessions and Abandonments":
IRS Publications can be generally found from this page:
Bear in mind that the discussion is a lay description of what the IRS thinks the law means.
The actual tax code is a statutory enactment known as the Internal Revenue Code ( http://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26.html
), which is supplemented by decisions of the U.S. Tax Court, other appellate courts, and administratively interpreted in the Treasury Regulations ( http://www.access.gpo.gov/cgi-bin/cfrassemble.cgi?title=201026
) as well as published decisions including those appearing within Internal Revenue Bulletins ( http://www.irs.gov/app/picklist/list/internalRevenueBulletins.html
If you are Bill Gates, you can probably afford to quarrel with the IRS. For almost everyone else, while an understanding of the underlying text of the Internal Revenue Code, Treasury Regulations and Internal Revenue Bulletins can be useful, you are usually going to be best served by avoiding aggressive interpretations of the law which might lead to conflict with the IRS. So reading and understanding the published guidance appearing within the official publications is probably the single most efficient and economic way to obtain an understanding of the tax consequences of a transaction.It should also be noted that those who are facing alternatives which include foreclosure, a deed in lieu and bankruptcy might be well counseled to carefully examine to alternative the tax treatment of various competing approaches, proposals or possible course of action.
I AM NOT AN ATTORNEY AND THIS IS NOT LEGAL ADVICE!