Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000 . The bank had made the loan to Gold when it purchased the real estate from Silver, Inc Pink, Inc, the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment

of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:
a. Include $40,000 in gross income.
b. Reduce the basis in its assets by $40,000.
c. Include $25,000 in gross income and reduce its basis in its assets by $15,000.
d. Include $15,000 in gross income and reduce its basis in the building by $25,000.
e. None of these.

c
RATIONALE: The $15,000 reduction in the mortgage held by Pink is an adjustment to the cost of the building, because the debt was owed to the party who sold the property to the taxpayer; in effect, the purchase price was adjusted. The $25,000 reduction by the bank is includible in gross income.