-12-
The bill provides that if a discharge of
indebtedness occurs when the taxpayer is insolvent (but
is not in a bankruptcy case), the amount of debt
discharge is to be excluded from gross income up to the
amount by which the taxpayer is insolvent.16
16The bill defines “insolvent” as the excess of
liabilities over the fair market value of assets,
determined with respect to the taxpayer's assets and
liabilities immediately before the debt discharge. The
bill provides that except pursuant to section
108(a)(1)(B) of the Code (as added by the bill), there
is to be no insolvency exception from the general rule
that gross income includes income from discharge of
indebtedness.
S. Rept. 96-1035, supra, 1980-2 C.B. at 627; see H. Rept. 96-833,
supra at 12.
3. Relevant Cases Cited in the Committee Reports
The Supreme Court in United States v. Kirby Lumber Co.,
284 U.S. 1 (1931), established the general rule that a debtor
realizes income when discharged of indebtedness (i.e., relieved
of indebtedness without full payment of the amount owed). In
that case, the taxpayer repurchased some of its own bonds in the
open market for $137,5212 less than what it had received upon
issuance earlier that same year. Justice Holmes distinguished
Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926), the Supreme
Court's first pronouncement on the subject of income from the
discharge of indebtedness, by stating:
the defendant in error [in Kerbaugh-Empire] owned the
stock of another company that had borrowed money
repayable in marks or their equivalent for an
enterprise that failed. At the time of payment the
2 For convenience, amounts have been rounded to the nearest
dollar.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011