-17-
liabilities for the purpose of determining whether the debtor's
net worth turns positive (assets exceed liabilities), i.e.,
whether assets are freed, as a result of the debtor's being
discharged of indebtedness.7
3. The Freeing-of-Assets Theory and the Statutory
Insolvency Calculation
From our examination of the statutory language, the
legislative history, and the relevant cases cited in the
committee reports, we conclude that the analytical framework of
the insolvency exclusion and its related provisions is based on
the freeing-of-assets theory. That theory establishes the
foundation for understanding the nature of the examination to be
afforded to obligations claimed to be liabilities for purposes of
the statutory insolvency calculation.
7 It should be noted that the net assets test requires an
examination of the debtor's net worth after he is discharged of
the indebtedness, whereas the statutory insolvency calculation
requires an examination immediately before the discharge. That
distinction, however, does not produce disparate results and is
simply the product of the manner in which the insolvency
exclusion and its limitation operate. For purposes of
illustration, assume the following facts: (1) a debtor has
indebtedness of $100 owed to C, assets of $130, and another
liability of $100 and (2) C discharges the debtor of the
indebtedness for payment of $20. The net assets test would find
that, after the discharge, the debtor has assets of $110 ($130 -
$20) and liabilities of $100 ($200 - $100), and, therefore, the
debtor realizes income to the extent his assets exceed his
liabilities, $10 ($110 - $100). The statutory insolvency
calculation would provide that the debtor is insolvent by $70
($200 - $130) and the amount of the exclusion under sec.
108(a)(1)(B) would be limited to that amount pursuant to sec.
108(a)(3); the debtor under sec. 61(a)(12) realizes $80 ($100 -
$20) of income and excludes $70 of that amount under sec.
108(a)(1)(B), for net income recognition of $10 (same as the net
assets test).
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