Dudley B. and La Donna K. Merkel - Page 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.                                             

               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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