NO GIFTS -- no discharge if original debt or subsequent forgiveness is a gift.
Purported debt instrument cannot be an equity interest like stock in a company – no discharge if the borrower-issuer later fails to redeem it.
Ditto if debt is too contingent or indefinite.
When is it a discharge and failure to satisfy the debt?
There can be no consideration for the discharge.
Early withdrawal fees by banks not discharge income excludible under §108(a)(1) – part of contract. (Why would the fees themselves be the discharge income???)
Must be failure to satisfy the debt.
If hotel guest incurs $100 but hotel forgives charge b/c of honeymoon, cancellation of indebtedness or a gift. But if charge cancelled in exchange for legal advice, debt is satisfied and not cancelled.
Transaction can be closed but will be analyzed as taxable exchange. Debtor may have income under §1001 (gain or loss). Debtor who performs services will have income and the creditor may have a business deduction. Releasing contract counterclaim means income from constructive receipt of damages.
Can be viewed as a two part transaction – releasing damage claim akin to cash payment in settlement of claim from lender to borrower and cash payment of loan from borrower to lender.