-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
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