-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
if--
(A) the discharge occurs in a title 11
case,
(B) the discharge occurs when the
taxpayer is insolvent * * *
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