Dudley B. and La Donna K. Merkel - Page 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                    
          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              

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