Please explain the conditions that made this to be not excluded from income. Also please explain why the amount 3000 was chosen as against the actual debt of 5000
He is liable for the cancelled debt because he did not have it expunged through a bankruptcy nor is he insolvent (when total debts are greater than total assets). If a personal financial statement showed that he was insolvent at the time of the debt cancellation, then he could have reduced or eliminated this cancelled debt by the amount of his total debt in excess of his total assets. As for the dollar amount of $3,000, I think it's because the question mentions it was his remaining balance. Also the credit union most likely would issue a 1099-C for the $3,000 and report it to the IRS.