Why are forgiven debts treated as income?

Why are forgiven debts treated as income?

After all it doesn’t really make sense: you don’t actually receive any money when debts are written off, but the IRS may require you to report it anyway. There are a lot of articles on the Internet that tell you that canceled and forgiven debts are considered income, but few if any seem to discuss why this occurs, so let’s look into this.

First, in accounting is a principle called the accounting equation:

Assets = Liabilities + Owner’s Equity

In terms of personal accounting, owner’s equity is your net worth — i.e. the cash value of all of your assets minus your liabilities.

Now whenever you acquire something, such as dining out or buying something for yourself, you incur a liability, convert assets, or lose equity. If you pay with your credit card, you’ve just incurred a liability. If you pay with cash, you either lose equity or you’ve converted assets by trading cash for another asset (such as a car).

There are two ways to cancel liabilities: either by decreasing assets (such as paying it off with cash) or by increasing your net worth. Even if debts are forgiven, this still holds true and cannot be evaded. If part of your debt is canceled, your accounts still have to balance out.

For example, let’s say you have a $1,500 credit card account that you settled for $1,000. That leaves a $500 liability that is no longer a liability. That $500 must be disposed somehow, and it must be disposed in such a way that everything still balances. But how?

Since you aren’t putting any assets toward the liability, the only proper way to dispose of the liability is by converting it to equity. And the only way to effectively convert it to equity is by treating the liability as if it were income. You are basically taking $500 you once owed and adding it to your net worth. This keeps everything balanced out.

In an accounting ledger, this is how it would look:

Account DR CR
Credit Card 1,500  
        Cash   1,000
        Canceled debt   500

Here, the "Canceled debt" account is an income account, and when the books are eventually reconciled, that $500 income contributes to your net worth. And it’s because of this that the IRS treats canceled debts as taxable income on the part of the debtor.

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The Supremacy Clause and Treaties

The Constitution typically is interpreted to be superior to every branch of government in the United States. It lays the framework for the Federal government and grants its powers while laying out explicitly several restrictions.

Article VI of the Constitution includes what is called the "Supremacy Clause":

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

Where the Constitution lays out that it, along with the laws passed by Congress and signed by the President and any treaties ratified by the Senate, shall be the "supreme Law of the Land", the Constitution is establishing its supremacy over all acts of the States, but only insofar as the Constitution grants Congress the power to do such actions.

But the Supremacy Clause tends to be misinterpreted by those advocating the separation of church and state. I’ve heard an argument similar to this on multiple occasions: the Supremacy Clause in effect provides that the language of a treaty shall be legally in equivalence to the language of the Constitution. Most recently I heard such language in a new Constitution lecture by Shane Killian on the separation of church and state.

In this lecture, at around 7:44, Shane makes this argument with regard to Article 11 of the Treaty of Tripoli:

According to Article VI [of the Constitution], any treaties made in pursuance of the Constitution are part of the Supreme Law of the Land. This declaration therefore has the same effect as if it were part of the Constitution itself.

In the comments to his video, I argued that he was "a little off" with this argument, that if the Constitution grants any treaties any legal equality to anything, it’s statutes enacted by Congress. He responded by posting Article VI to the Constitution, following with "Direct quote", as if that were to mean anything.

In his response, I quoted directly from Reid v. Covert, 354 US 1 (1957): "This Court has regularly and uniformly recognized the supremacy of the Constitution over a treaty".1

To firmly show that the Constitution is superior to any actions of Congress, and to further display that treaties are equivalent to other ordinary actions of Congress, the Court further declared in Reid:

This Court has also repeatedly taken the position that an Act of Congress, which must comply with the Constitution, is on a full parity with a treaty, and that when a statute which is subsequent in time is inconsistent with a treaty, the statute to the extent of conflict renders the treaty null. It would be completely anomalous to say that a treaty need not comply with the Constitution when such an agreement can be overridden by a statute that must conform to that instrument.2

Further, it is very dangerous to state that treaties have "the same effect as if it were part of the Constitution itself". This implies that treaties can bypass the amendment process laid out in Article V, and that treaties can confer additional powers to the government, as if ratifying a treaty is, in effect, amending the Constitution without going through the necessary process. A very dangerous notion indeed, and one that the Supreme Court also directly addressed in the Reid decision: "no agreement with a foreign nation can confer power on the Congress, or on any other branch of Government, which is free from the restraints of the Constitution."3

The Constitution is supreme to any action of the Federal government, and this includes treaties. This was first stated by the Supreme Court in Marbury v. Madison, 5 US 137 (1803): "Thus, the particular phraseology of the Constitution of the United States confirms and strengthens the principle, supposed to be essential to all written Constitutions, that a law repugnant to the Constitution is void".4 In Marbury the Supreme Court overturned an act of Congress that sought to modify the Supreme Court’s jurisdiction, which is firmly established in Article III, Section 2 of the Constitution.

Again the Constitution is supreme to any act of the Federal government, including treaties. The Treaty of Tripoli or any treaty to which the United States is a party is not equal to the Constitution in any way, and to say that a treaty is equal to the Constitution is dangerous.

  1. Reid v. Covert, 354 US 1 at 17 []
  2. Reid v. Covert, 354 US 1 at 18 []
  3. Reid v. Covert, 354 US 1 at 16 []
  4. Marbury v. Madison, 5 US 137 at 180 []
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Never miss your court date

This is pretty much sound advice, and advice I definitely kept in my own personal dealings. You see, I have the unfortunate ability to say that I was involved in a lawsuit — and I was the defendant.

One of my creditors decided to take me to court to sue me over a debt that had gone unpaid. The court date was set for March 11.

Now let me first explain this debt so you’ll get an idea of how far things went. The last payment on the debt was I believe in July 2008. In March 2008, I was laid off from my job and started collecting unemployment when my severance package ran out at the end of April 2008. Anyone who’s been on unemployment knows that, if you’re used to making more than $20K per year, you’re stuck.

The money I was receiving had to go to the most essential expenses: rent, my car, utilities, and groceries. Practically all of my credit accounts fell behind, and almost all fell into collections.

Now back in August 2009, I received first communication from the collector in question, and the address on the envelope was for Kansas City — the creditor placed the account with a local debt collector, certainly a smart move. Within a short time I sent off the validation request and waited for the validation materials to come back.

That didn’t happen, though. The next mailing I received from the collector was another letter that was another attempt to collect — a violation of the Fair Debt Collection Practices Act. I sent them a reminder that the debt was still considered disputed and that their attempt at collection was in violation of the law.

Really what I should’ve done, in hindsight, was not said anything and let them instead rack up the violations, but oh well.

In January of 2010, I was informed by mail that they were pursuing this debt through the Court. They provided the case number and all details, and I awaited service which would happen on February 13 with the court date set for March 11.

On March 8 I paid off the debt collector, in full. Because this happened so close to the court date, they said they’ll go for a dismissal in person in Court on the court date.

The account representative also said that I didn’t have to show up in person in Court.

Good thing I have a natural distrust for people to whom I previously owed money. Never trust when a person says, "You don’t have to show up in Court", or "Just ignore the papers".

So I decided to show up anyway, and it’s a good thing I did. As I sat in the gallery as a lot of people filed into Court, the bailiff walked around to collect everyone’s court documents to present to the Clerk, just to see who showed and who didn’t. A few minutes later they were handed back to us.

About 15 minutes later came the "oyez, oyez" — everyone rising as the judge entered the Court to preside.

When my case was called, and I approached the bench, I was asked only one question, "Do you agree or disagree with the petition?" Or something along those lines.

My response was that the debt had been resolved earlier this week. Simple response, to which the woman who asked the question requested the judge for a settlement hearing, which was scheduled for April 15.

I remember when walking out of the courtroom how surreal the experience seemed.

What would have happened if I never showed? I’m not entirely sure. But I’m glad I showed up. On March 23, I received in the mail a copy of a court filing showing that the plaintiff in the case — i.e. the debt collector — was moving forward with a dismissal, which was made final by the Court on March 26.

So if you’re ever served with a lawsuit and summoned to Court, don’t miss that court date unless you have confirmed with the Court that you do not need to show. For some, you might think this is common sense, but many debt collectors do bank on you not showing up to Court.

Never miss your court date.

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Constitutional reality

The Constitution is irrelevant.

There, I’ve said it. The Constitution is irrelevant. All of our arguing about the Constitution, all of our bickering over its meaning… worthless, wasted time.

You see, there is quite literally nothing stopping those in Washington from literally doing what they want. Nothing.

They can pass whatever legislation they want, using whatever methods they want. And if it’s overturned by the Court, they can just ignore the Court’s rulings. That is one fear that Chief Justice John Marshall had — that their rulings may not be relevant because the Constitution gives the Court no way to enforce them.

John Marshall was on to something when he said this.

If the Executive Branch and Congress chose to ignore the rulings of the Supreme Court, there was nothing to stop them.

The government recently showed how irrelevant the Constitution is. They’ve been ignoring the Constitution for years, passing legislation that usurps power and tries to make the Federal government as powerful as possible if not supremely powerful. And before you start thinking that this started with President Bush, try looking back further. Reagan? Nope. FDR? Nope. Woodrow Wilson? Teddy Roosevelt?

They’ve been keeping up the facade of the Constitution to give us the illusion of being in charge, but the People have lost their power. Little by little, the Federal government has been vacuuming up the power in this country.

The Constitution is irrelevant. Plain and simple. Why?

We have let it become irrelevant.

The Constitution is worthless unless We the People enforce it. It is not the responsibility of the police or law enforcement agencies to enforce the Constitution. They’re not even required to protect the people. Their only responsibility is to the Constitution and the laws.

We enforce the Constitution. Not the government. Not the Courts. The responsibility for enforcing the Constitution falls on us, the People.

And we have been derelict in our duty, and the government and those seeking power know it.

We must defend the Constitution when it is threatened from without, and we must enforce the Constitution when it is threatened from within.

We the People are the reason the Constitution is becoming irrelevant. The question now becomes what we can do to make it relevant again, and keep it relevant far into the future.

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On the Passage of the Health Care Bill

Earlier today, Bryce McMinn, who has the…opportunity of questionable fortune to be related to me by marriage through one of my cousins, penned a note on his Facebook profile expressing his obvious discontent with the recent passage of the health care measure in the House of Representatives:

We can’t be too upset or shocked. The damage was done in 2006 when Americans handed the House of Representatives over to Socialists and Communists like Nancy Pelosi. It happened in 2008 when we elected a Marxist President and even MORE Communists and Socialists in the House and Senate.1 [more…]

Now Bryce and I don’t see eye-to-eye on everything, but we both have a mutual disgust of the unconstitutional health care reforms making their way through the political process. He’s definitely not afraid to speak his mind on pretty much any issue, and this latest example is definitely worth a read.

  1. McMinn, Bryce. (2010, March 22). "On the Passage of the Health Care Bill". []
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Rep. Steve King

On Glenn Beck‘s radio program, Congressman Steve King [R-IA(5)] said this on March 18, 2010:

This is my argument and I have made it publicly a few times, but in 1973, when Roe versus Wade was first a decision of the Supreme Court, ever since then, people over on that side of the philosophical line having making the argument that the Federal Government has no business telling a woman what she can or can’t do with her body but today the same people are making the argument that the Federal Government has every business to tell everybody in America what they can or can’t do with their body.1

Congressman, I am pro-choice. I argue that no government has the right to tell any person what they can and cannot do with their body. I am pro-choice in all respects — my body, my decision, and the government can get the hell out of my way.

I, contrary to the argument you publicly broadcast to millions of people across the United States, am not telling the American people what they can or cannot do with their body, and I never will, nor do I have the desire to do so.

Just wanted to clear that up for you.

  1. GlennBeck.com. (2010, March 18). "Will it pass? Steve King". []
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Commentary on the right to bear arms

The Second Amendment to the Constitution of the United States:

A well regulated militia being necessary to the security of a free State, the right of the People to keep and bear arms shall not be infringed.

Arguably the most controversial of all the Amendments, the right to keep and bear arms is paramount to individual freedom and is key to not only individual sovereignty but the sovereignty of the United States. After all, if the military should fail to defend the United States, the responsibility to protect the country falls to the citizenry.

Under 10 USC § 311, all able-bodied men between 17 and 45 years of age who are citizens of the United States or who have declared intent to become a citizen comprise the militia of the United States. More specifically, it is called the unorganized militia.

And should the citizenry fail to protect the country, the country falls.

But the right to keep and bear arms extends further and comes down to one simple concept: the police do not have a responsibility to protect you, only to enforce the laws and ensure those who break them are arrested and appropriately prosecuted. And in some situations and locations, the expectation of police protection is unreasonable, such as in remote, rural locations.

Now the police do have a responsibility, to the best of their ability, to prevent crimes from occurring. This means that if an officer arrives to a crime in progress, they will try to put a stop to the crime through reasonable means. But if the police can’t arrive in a reasonable amount of time, it’s up to you to defend yourself.

Again, the police have no obligation or constitutional duty to protect you.12

But the Second Amendment applies to more than just firearms. It applies to anything that can be used or brandished as a weapon — crowbars, baseball bats, Coca-Cola bottles. To "keep and bear arms" means simply that you have the right to possess use a weapon.

But is this really a "right"? Let us recall what I said about the definition of a right:

A right is inherent and inalienable, something for which no action is required of anyone else for you to retain, but much action is required of you for you to protect.

Under this definition, is the "right to bear arms" actually a right? First, anything that is perceived as a "right", whether actually fitting the definition or not, will be dubbed inherent and inalienable. And if it is something you believe in, it’ll be a point of view you’ll expend effort to protect.

But the key question is this: is any action required of anyone else for you to retain or exercise this right? No.

Even if firearms didn’t exist, you could simply clench your fist, or you could fashion your own weapon by brandishing a fallen branch as a club or even a large rock.

A person’s right to self-defense is inherent, and the right to bear arms is an extension of this. The right to bear arms means simply that you can brandish a weapon in an effort to defend yourself, your family, or someone else.

But the government does not have a right to tell you which weapons you cannot use, at least not without good reason. For example, while firearms can kill people, bombs can kill a lot of people and bring down buildings, so there is ample reason for the government to deny you the ability to obtain and possess them.

Firearms however hold a special meaning under the Second Amendment for one simple reason: they are the most effective personal assault weapons when it comes to fending off an attack from other individuals, foreign invaders or, in the worst case scenario, our own government.

They are also the reason the United States won her freedom from England. Never forget that.

But firearms are necessary in many places for personal defense for another simple reason: those who may intend to harm you might be carrying one themselves, and its never a good idea, to borrow the cliché, to bring a knife to a gunfight.

Plus someone intent on turning you into a crime victim will likely back down upon realizing you’re carrying a firearm.

  1. Castle Rock v. Gonzales, 545 U.S. 748 (2005), which addressed a claim that a woman with a restraining order is entitled to protection by the police by virtue of having the court order. []
  2. Other cases listed here, courtesy of "End Times Report" []
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Have you heard of Kent Schaible?

Anyone who has conversed with me in detail knows how I feel about parents substituting prayer or homeopathy for actual medicine in treating their children. In early 2008, the case of Madeline Neumann received international attention and once again brought the case of faith-based treatments to the forefront of international scrutiny.

On January 24, 2009, at approximately 9:30pm EST, 2 year-old Kent Shaible passed away from complications due to bacterial pneumonia at his family home.1 His parents — Herbert and Catherine Schaible, 41 and 40, respectively — were over him praying for him to get better.

Kent would’ve been turning 4 years-old on July 17.2

Bacterial pneumonia is very treatable. A regimen of antibiotics along with plenty of rest and fluids is all it takes.3 Instead of being dead in two weeks from onset, Kent would’ve been a living and healthy, happy toddler.

There was very little on this case in the news — I never heard about it until recently and I tend to read the news every day. Most of the news of this case didn’t surface until the trial for the parents was set, which occurred in October 2009. I’ve yet to find a news story about this case from January 2009 or shortly thereafter. Much of the discussion of this case happened instead in the blogosphere and opinion pages. So unless you read various religion-based blogs, which I don’t, you probably haven’t heard of this case.

When Madeline Neumann died in March 23, 2008, the press was all over it. Like I said, it received international attention. And Madeline’s case overshadowed the case of 15-month old Ava Worthington (d. March 2, 2008), but even Ava’s case was in the news shortly after her death.

But I still cannot help but ask the question whether Ava’s case would’ve slipped quietly beneath the waves if Madeline’s case hadn’t brought the issue to the forefront?

One of the big issues is that, with these cases becoming more frequent, the parents have yet to receive any kind of worthy sentence. Madeline’s parents received ten years probation each and were ordered to serve 30-days in jail each year for the next six years.4

And one of the things that allows these parents to walk out of the courtroom with little more than a slap on the wrist is the fact that many States have laws exempting parents from responsibility when they substitute prayer over medical attention.

Now I am a libertarian, meaning that I will fully defend someone’s right to practice their religion. However as I’ve said previously, you do not have the right to compromise the health or life of your child by refusing to seek medical attention.

When will these parents learn that prayer alone will not do the job? After all, why should God do for you what you can already do for yourself?

  1. Dean, Mensah M. (2009, October 8). "Faith-healing parents charged in death of infant son". Philadelphia Daily News. []
  2. Search for Kent Schaible through the Social Security Death Index []
  3. WebMD.com. "Bacterial Pneumonia: Symptoms, Causes, Tests, and Treatment". []
  4. Riordan, Kathy. (2009, October 6). "Judge Shows Leniency to Parents in Wisconsin Prayer Death". Open Salon. []
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"There should be a law"

"That should be illegal."

Typically when someone says something like this, it means one thing: they’ve heard or seen something which has no direct impact upon them, but because they don’t like it for some reason, they feel it should be outlawed.

Recently introduced in the Massachusetts legislature is a proposal that would make circumcising a male child a criminal offense punishable by fine or up to 14 years in jail. Could you imagine jailing a rabbi for doing something that is part of their religious tenets?

Now there is a growing movement against male circumcision, with many calling it unnecessary and even detrimental — though there’s nothing detrimental about the fact that circumcision reduces a male’s susceptibility to STDs (still a good idea to use condoms) along with reducing the chances of penile issues such as fungal and skin infections because of that foreskin.1

So what’s the point of the legislation, besides the obvious violation of the rights of Jews to practice their religious tenets? There isn’t one. There is no point to or any benefit derived from outlawing circumcision.

But a lack of point or benefit hasn’t stopped legislatures from pointlessly outlawing other things over the years. Arguably the most famous example is Prohibition. It started in 1920 as part of a growing movement to do away with alcoholic beverages in society, and was simply an implementation of one idea: some people get drunk, fewer still cause problems when drunk, so no one should be able to drink alcohol at all.

For thirteen years this experiment lasted in the United States, spawned after the ratification of Eighteenth Amendment. (Trivia question: Is the Eighteenth Amendment still a part of the Constitution? Answer later.)

So what was the result?

Increased crime and increased alcohol consumption because it was illegal. Plus enforcing prohibition drained government coffers because there was now no longer any tax revenue coming in from excise taxes on alcohol. On the plus side, it was great for the economy, especially the California grape market, and not to mention the underground black markets that were distributing bootleg booze.

Prohibition was finally brought to its end in 1933 following the ratification of the Twenty-first Amendment which, while repealing the Prohibition amendment, also gave Congress the unilateral authority to control the interstate sale and delivery of alcoholic beverages. Those laws are enforced by the Bureau of Alcohol, Tobacco, and Firearms and Explosives (ATF).

Prohibition taught the United States one lesson it has since forgotten: legislation will, nine times out of ten, not work. I posted this to my Facebook page earlier:

It doesn’t work for drugs, extramarital affairs (yes some States have laws making it a crime to cheat on your spouse), sex between unmarried yet consenting adults, even adults of the same sex, and even with the exchange of money involved (i.e. prostitution). It didn’t work for abortion, and it certainly didn’t work during prohibition.

Currently Nevada is the only State in the United States where prostitution is legal and regulated. Laws against prostitution are costly to enforce, and it leads to a lot of other problems. Currently there are candidates for governorships who are campaigning on the idea of legalizing prostitution along with marijuana.

Which brings me to the "war on drugs". I’ll just say this: it’s time to surrender. The laws aren’t working. They are also costly to enforce, they’ve led to a thriving black market for contraband substances, and have in the end led to more problems than they’ve solved.

If we want to get rid of drugs in our society, we need to better teach our children to stay away from them. Hey if I could learn to stay away from drugs, so can others.

Legislation is not the answer. As I said, it is not working for prostitution and drugs, it didn’t work for prohibition and abortion, and it won’t work for many of the other things for which someone has said "there should be a law".

It half surprised me when I learned that some states2 have laws on the books criminalizing adultery, though in the wake of the landmark case Lawrence et al. v. Texas, 539 US 558 (2003), these laws are not really enforceable any longer, as are laws criminalizing fornication3.

And then there are laws banning pornography and other "obscene" materials. Oh dear God. Oh wait, it’s typically in his name that stuff that is considered "obscene" should be banned. That’s why the novel Fanny Hill was "banned" in the United States until 1960 (it was originally published in 1749). To quote Larry Flynt, "If the human body is obscene, complain to the manufacturer".

If I, as an adult, wish to seek out "obscene" material, what place has the government to tell me that I cannot do that? The answer is simple: absolutely none.

And "blue laws", which are laws prohibiting certain acts on Sundays, have got to be some of the dumbest laws ever conceived, let alone enacted. If I want to work on a Sunday (which I have, many times over), that is between me and God, not between me and the government.

Laws that do nothing for society, and actually infringe on the rights of others, have no place being enacted. Repeal the laws that do not work, and stop passing stupid laws that will not work and will only create a tingling sensation between someone’s legs whenever they say "at least it’s illegal".

Give me a break.

* * * * *

Trivia: Is the Eighteenth Amendment still part of the Constitution of the United States? Yes.

The amendment process established under Article V of the Constitution does not call for the text of the Constitution to be modified directly. Instead all Amendments that are ratified are called "codicil", meaning they are merely attached to the Constitution but override some part therein.

The fact that the Twenty-First Amendment repeals the Eighteenth does not mean the Eighteenth Amendment is removed from the Constitution. It means only that the Twenty-First Amendment invalidates or nullifies it, but we still leave it in place. This is important in preserving the revision history of the Constitution through time.

In interpreting the Constitution, where an Amendment and the main body of the Constitution conflict, the Amendment controls. However where two Amendments conflict, the newer Amendment controls.

This is also quite different from the standard legislative process in which acts of Congress do call for direct modifications to the US code along with additions and removals (repeals).

  1. WebMD.com. "Sexual Health: Circumcision". []
  2. Code of Virginia § 18.2-365 []
  3. Code of Virginia § 18.2-344, Utah Code 76-7-104 []
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