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the bankruptcy law, Pub. L. 95-598, 92 Stat. 2549, Congress
“intended to complete the process of revising and updating
Federal bankruptcy laws by providing rules governing the tax
aspects of bankruptcy and related tax issues.” Staff of Joint
Comm. on Taxation, Description of H.R. 5043 (Bankruptcy Tax Act
of 1980) as Passed the House, at 3 (J. Comm. Print 1980).
The relevant committee reports (the committee reports)
accompanying H.R. 5043, 96th Cong., 2d Sess. (1980), which became
the Bankruptcy Tax Act, provide that the proposed insolvency
exclusion is intended to insure that an insolvent debtor outside
of bankruptcy (like a debtor coming out of bankruptcy, who is
accorded a “fresh start” under the bankruptcy law) is not
burdened with an immediate tax liability. See S. Rept. 96-1035,
at 10 (1980), 1980-2 C.B. 620, 624; H. Rept. 96-833, at 9 (1980).
The pre-existing law is described as follows:
Under a judicially developed “insolvency exception,” no
income arises from discharge of indebtedness if the
debtor is insolvent both before and after the
transaction;1 and if the transaction leaves the debtor
with assets whose value exceeds remaining liabilities,
income is realized only to the extent of the excess.2
* * *
1Treas. Regs. � 1[.]61-12(b)(1); Dallas Transfer &
Terminal Warehouse Co. v. Comm'r, 70 F.2d 95 (5th Cir.
1934).
2Lakeland Grocery Co., 36 B.T.A. 289 (1937).
S. Rept. 96-1035, supra, 1980-2 C.B. at 623; see H. Rept. 96-833,
supra at 7. The proposed insolvency exclusion is described in
terms that reflect the preexisting insolvency exception:
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