Answer the following:

a$.$ Why is it important to distinguish debt cancellation from a gift, bequest, or renegotiation of a purchase price?

b$.$ What happens to the basis of an asset if the taxpayer renegotiates its purchase price?

a$.$ Why is it important to distinguish debt cancellation from a gift, bequest; or renegotiation of a purchase price?

A$.$ Debt cancellation and gifts received always result in taxable income, while a bequest or renegotiation of a purchase price are never taxable.

B$.$ Debt cancellation never results in taxable income while gifts, bequests, and renegotiations of purchase price are always taxable.

C$.$ Debt cancellation results in taxable income while gifts, bequests, and renegotiations of purchase price are not taxable.

D$.$ Debt cancellation and gifts received are not taxable income, while a bequest or renegotiation of a purchase price are always taxable.

b$.$ What happens to the basis of an asset if the taxpayer renegotiates its purchase price? $($Assume the renegotiated purchase price results in a debt reduction.$)$

A$.$ In most cases, the taxpayer must reduce the basis of the property by the amount of the debt reduction.

B$.$ If the taxpayer renegotiated the purchase price because the market value of the asset decreased, the taxpayer must reduce the basis of the property by the percentage of the market value decrease.

C$.$ If the taxpayer renegotiated the purchase price because the company became insolvent within $90$ days of the purchase of the asset, the taxpayer must increase the basis of the property by the asset value lost on the taxpayer.

D$.$ In most cases, the taxpayer can increase the basis of the property by the amount of the debt reduction.