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excluded from gross income if the discharge occurs when the
taxpayer is insolvent. The amount of income from discharge of
indebtedness excluded under section 108(a)(1)(B) is not to exceed
the amount by which the taxpayer is insolvent. Sec. 108(a)(3).
For purposes of section 108, the term “insolvent” means the
excess of liabilities over the fair market value of assets. Sec.
108(d)(3). Whether the taxpayer is insolvent, and the amount by
which the taxpayer is insolvent, is determined on the basis of
the taxpayer’s assets and liabilities immediately before the
discharge.
Petitioners did not submit to respondent or to the Court any
contemporaneous records or documents to establish the value of
their assets or liabilities at the time the second mortgage was
canceled. The night before the trial petitioners created a list
of their assets and liabilities from information stored on their
computer. Petitioners relied upon that list and Mr. Gale’s oral
testimony as evidence of the value of assets owned and
liabilities owed in 2001 immediately before the discharge.
Having observed Mr. Gale’s appearance and demeanor at trial, we
find his testimony to be honest, forthright, and credible.
Immediately before the discharge of indebtedness, without regard
to Mr. Gale’s CSRS pension benefit and thrift savings account,
petitioners had liabilities of $92,839 which exceeded the $29,968
value of their assets by $62,871, shown as follows:
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Last modified: May 25, 2011