1. P purchased a business machine from S at a price of $100,000. P paid S $10,000 cash and agreed to pay $90,000 balance in nine equal annual installments beginning in the following year. The deferred payments were secured by a security interest in the machine. Two years later, P had reduced the principal balance of the debt to $70,000, but the machine had fallen in value to $50,000. At that point, S agreed to accept $50,000 in full satisfaction of the debt principal. What result to P if:
(a) P was insolvent immediately after S reduced the debt?
(b) Alternatively, P was solvent at all times?
According to IRS Publication 4681 (2015), Canceled Debts, Foreclosures,
Repossessions, and Abandonments:
a) If P was insolvent immediately after S reduced the debt, the debt would be
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