COD isn't about delivery in this case.

That is retired Army Lieutenant Will Milzarski.  He was working as a disability right attorney in Michigan when at the age of 40 he decided to rejoin the Army and go through Officer Candidates School.  It is a tough course for a young man and for a 40 year old, tougher.  He made it through and did two tours in Afghanistan where he was wounded.  He is now on disability for his traumatic brain injury, hearing loss and memory problems.  He had tried returning to his job with the state but retired due to his memory loss and inability to concentrate.

He was unable to repay over $220,000 in student loans and because the VA had declared him permanently and totally disabled, the Department of Education forgave those loans.  Then he got a notice from the IRS demanding payment of $62,000 in tax on those forgiven loans.

It is known as Cancellation Of Debt (COD) income.  The concept is simple enough.  You go to a lender and borrow money.  Because you are obligated to repay this loan, it is not considered income.  But the moment that you are no longer required to make repayment, the balance owed becomes income to you.  After all, you did get the money.

This logic is why monies borrowed for student loans can be claimed as education expenses as though the student had just paid the expense with their own money.  Same thing for medical expenses you pay by putting them on a charge card.  You may not pay off that balance for years, but you get the deduction

As a tax professional I see a lot of clients who have a COD income problem.  The two most common types are when a credit card debt was written off by the bank, or when a home is foreclosed on/short sold.  There's a special provision in the tax code that allows the COD income from an unpaid mortgage on your principal residence to be excluded from income.

Lieutenant Milzarski is being assisted in his battle with the IRS (and the state of Michigan, which is seeking another $8,000 in tax) by the Michigan State University Low-Income Tax Clinic.  They managed to get the amount of loan forgiveness subject to income tax from $223,000 to $161,000.  While the news articles don't go into detail on how this was done, it seems certain that they applied what is known as Exclusion of COD Income to the level of insolvency.  Basically, the amount by which you are insolvent (the amount by which your total debt exceeds your total assets) is used to reduce the amount of COD income that is taxed.  But the IRS refused to settle for less than the full amount owed (the clinic is appealing that decision).

The section of the Internal Revenue Code that governs taxation of discharge of indebtedness has a number of exceptions where debts that were forgiven are excluded from taxation.  They include:

Bankruptcy (obviously)
Student Loan debt when the debtor works in a specified profession
Participation in a Public Health Corps Loan program
Qualified Farm Indebtedness

Should Congress add a provision for excluding student loan debt forgiveness for disabled veterans?  Veterans in general?  Certain groups of veterans?  Why not all first responders?

I think that anyone who is considered permanently and totally disabled should be granted forgiveness of their student loans without subjecting them to COD income taxation on the forgiven amount, if they can demonstrate that repayment would constitute an undue financial hardship.  But the current position of the U.S. Department of Education seems to be to oppose loan forgiveness in almost any instance, and the IRS aggressively pursues instances of COD income.

Will this be dealt with in the current attempt to "reform" our income tax system?  Doubtful.  The Republicans in the House, Senate and White House are far more interested in giving more tax breaks to the wealthy.