Ark. Code R. 26-51-404 - 1(b)(11) (1997) - Cancellation or Forgiveness of Debt

The cancellation and forgiveness of indebtedness may amount to a payment of income, a gift or a capital transaction, depending upon the circumstances. If, for example, an individual performs services for a creditor in exchange for cancellation of a debt, income equal to the debt is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor, and, without any consideration therefore, cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the debtor's gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.