-19-
freeing-of-assets theory, a debtor does not realize income when
discharged of a particular indebtedness, however, if his post-
discharge liabilities equal or exceed his postdischarge assets
(if any); i.e., under the net assets test, the debtor's
liabilities equal or exceed his assets after the discharge (or,
the statutory insolvency calculation shows that the debtor is
insolvent by an amount greater than or equal to the discharge of
indebtedness income, see supra note 7). Clearly, an
indiscriminate inclusion of obligations to pay in the calculation
of postdischarge liabilities (or, in the statutory insolvency
calculation), without any consideration of how speculative those
obligations may be, would render meaningless any inquiry as to
whether assets are freed upon the discharge of indebtedness.
Logic dictates that an obligation to pay is a liability under the
freeing-of-assets theory only if it can be said with a
satisfactory degree of certainty that the obligation offsets
assets. The critical inquiry, of course, is the level of
certainty that is satisfactory.
8(...continued)
creates the taxable gain. Such reasoning misses the
point. Income results from the discharge of
indebtedness because the taxpayer received (and
excluded from income) funds that he is no longer
required to pay back, not because assets are freed of
offsetting liabilities on the balance sheet. * * *
Bittker & Thompson, supra at 1165. That criticism, however, does
not apply to a statutory exclusion from income that simply
employs the freeing-of-assets theory to achieve objectives other
than a definition of income. See infra sec. II.C.6.
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