Wilma is thinking about opening up her own law firm, but she will need some capital to get the practice off the ground. She goes to a bank and…

Wilma is thinking about opening up her own law firm, but she will need some capital to get the practice off the ground. She goes to a bank and borrows $100,000. The loan agreement’s terms include a 30 year maturity (she will have to pay the loan back in 30 years), and an annual interest rate of 7%. Assume that 2 years later the interest rate environment changes and rates increase to 10%. The bank now decides it would rather have $75,000 to lend out at 10% than a $100,000 loan on which it only collects 7%. So, the bank notifies Wilma that if she pays back $75,000 immediately, they will forgive her $100,000 loan. What are the tax implications to Wilma if she accepts the bank’s offer?

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