John Franklin Foust - Page 13

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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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