Henry P. and Darlene C. Brantley - Page 5

                                                  -5-                                                   
                  Throughout  the  administrative  proceeding,  petitioners                             
            maintained that they did not receive income from the cancellation                           
            of the $228,000 note.  They stated that the revenue agent erred                             
            when he determined that the cancellation of petitioner's note to                            
            Elite on April 2, 1990, was connected to Elite's redemption of its                          
            stock from H. Enterprises on April 19, 1990.  Petitioners                                   
            contended that the cancellation of petitioner's debt to Elite was,                          
            in essence, a reduction of the $300,000 purchase price for Elite's                          
            stock to reflect Elite's correct value pursuant to section                                  
            108(e)(5)2 or as a setoff for damages because of misrepresentations                         

            1(...continued)                                                                             
            face value.  United States v. Kirby Lumber Co., 284 U.S. 1                                  
            (1931).  A reduction in debt without a corresponding reduction in                           
            assets causes an economic gain and income to the debtor because                             
            assets are no longer encumbered.  Generally, a cancellation of                              
            indebtedness produces income to the debtor in an amount equal to                            
            the difference between the amount due on the obligation and the                             
            amount paid for the discharge.  If no consideration is paid for                             
            the discharge, then the entire amount of the debt is in most                                
            circumstances considered the amount of income that the debtor                               
            must include in income.  Sec. 61(a)(12); Babin v. Commissioner,                             
            23 F.3d 1032, 1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.                              
            2           Sec. 108(e)(5) provides:                                                        

            SEC. 108.  INCOME FROM DISCHARGE OF INDEBTEDNESS.                                           
                             *     *     *     *     *     *     *                                      
                  (e)  General Rules for Discharge of Indebtedness (Including                           
                  Discharges Not in Title 11 Cases or Insolvency).--For                                 
            purposes of this title--                                                                    
                             *     *     *     *     *     *     *                                      
                        (5)  Purchase-money debt reduction for solvent debtor                           
                                                                          (continued...)                




Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  Next

Last modified: May 25, 2011