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Section 61(a) defines gross income as “all income from
whatever source derived, including * * * Income from discharge of
indebtedness”. In 1989, the ASCS disaster payment and the
Federal crop insurance payment were applied in their entirety to
discharge Cheyenne’s debts due and owing. Therefore, Cheyenne
had income in 1989 to the extent of the debts discharged, and
this income flowed through to petitioner by reason of the
operation of subchapter S.
The debts of Cheyenne were not discharged in bankruptcy.
Regardless of whether petitioner was relieved of any personal
liability for Cheyenne’s debts by the discharge order of the
bankruptcy court, Cheyenne’s petitions in bankruptcy were both
dismissed. Therefore, as to Cheyenne, these debts were not
discharged in bankruptcy.
Petitioner has not established that the Federal crop
insurance payments are excludable from the gross income of
Cheyenne. The insurance coverage applied in the event of
nonproduction rather than destruction. The crop insurance was
paid because crops could not be produced, not as compensation for
a casualty loss. “It is well settled that proceeds from a
business interruption policy, which compensates for lost profits
or earnings, are taxable as ordinary income”. Seidenfeld v.
Commissioner, T.C. Memo. 1995-61; see also Massillon-Cleveland-
Akron Sign Co. v. Commissioner, 15 T.C. 79 (1950).
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Last modified: May 25, 2011