Does the mortage forgiveness debt relief & cancellation apply to a short sale

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The Question: Does the mortage forgiveness debt relief & cancellation apply to a short sale?
I have an attorney that is of the opinion that is doesn’t but an account that said it does.
The Question is: Does this apply to a short sale?

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012.Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

*Qualified principal residence indebtedness:
This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
*Bankruptcy: Debts discharged through bankruptcy are not
considered taxable income.
*Insolvency: If you are insolvent when the debt is cancelled,
some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
* Non-recourse loans: A non-recourse loan is a loan for which the
lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences.
Please include source document to support your point of view or how you came to your conclusion.

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