Which scenario allows a taxpayer to exclude all income from canceled debt?

In the context of canceled debt and taxation, a taxpayer can exclude income from canceled debt if they were insolvent at the time the debt was canceled. Insolvency means that the taxpayer's total liabilities exceed their total assets.

The scenario that enables a taxpayer to exclude all canceled debt income is when their insolvency exceeds the amount of the canceled debt. In this case, having $11,500 of debt canceled while being insolvent by $12,000 allows for the full exclusion of the canceled debt. Since the amount of debt canceled is less than the total insolvency, there is no taxable income generated from the cancellation.

In all other scenarios provided, either the amount of canceled debt exceeds the insolvency, or the taxpayer has made a partial exclusion. These situations do not meet the criteria for total exclusion of income from canceled debt, as they either have to recognize some portion of the canceled debt as income or do not exceed the level of insolvency necessary for exclusion. Thus, the correct option illustrates a situation where full exclusion is applicable.