Dudley B. and La Donna K. Merkel - Page 8

          liability basis with due regard to all of the circumstances that            
          existed” at the time insolvency is to be determined.  With                  
          respect to contingent liabilities, petitioners concede:  (1) “the           
          likelihood of the occurrence of the contingency * * * [may be] so           
          remote as not to give rise to a liability” and (2) “a contingent            
          liability may be a liability; however, the amount of that                   
          liability may be less than the amount of full exposure.”                    
          Petitioners would have the Court find that both petitioners'                
          guarantees and the State tax exposure were liabilities in                   
          existence on the measurement date, to be taken into account                 
          (perhaps at “less than the amount of full exposure”) under                  
          section 108(d)(3).                                                          
          II.  Analysis                                                               
               A.  The Code                                                           
               Section 61(a)(12) provides that gross income means all                 
          income from whatever source derived, including income from                  
          discharge of indebtedness.  In certain circumstances, however,              
          income from discharge of indebtedness is excluded from gross                
          income.  In relevant part, section 108(a) provides:                         
                    (1) In general.--Gross income does not include any                
               amount which (but for this subsection) would be                        
               includible in gross income by reason of the discharge                  
               (in whole or in part) of indebtedness of the taxpayer                  
                         (A) the discharge occurs in a title 11                       
                         (B) the discharge occurs when the                            
                    taxpayer is insolvent * * *                                       

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