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4. Horizontal Equity is Not the Guiding Principle
Although we have concluded that the analytical framework of
the insolvency exclusion and its related provisions is based on
the freeing-of-assets theory, we note that the committee reports
indicate that Congress intended to achieve a measure of
horizontal equity in enacting section 108(a)(1)(A) (the
bankruptcy exclusion) and the insolvency exclusion; i.e.,
affording similar treatment to debtors coming out of bankruptcy
and insolvent debtors outside of bankruptcy:
To preserve the debtor's “fresh start” after
bankruptcy, the bill provides that no income is
recognized by reason of debt discharge in bankruptcy,
so that a debtor coming out of bankruptcy (or an
insolvent debtor outside bankruptcy) is not burdened
with an immediate tax liability. * * * [Emphasis
added.]
S. Rept. 96-1035, at 10 (1980), 1980-2 C.B. 620, 624; H. Rept.
96-833, at 9 (1980). That expression of legislative purpose may
suggest that, in making an examination of obligations claimed to
be liabilities for purposes of the statutory insolvency
calculation, Congress intended an examination that is dependent
on the treatment of such obligations in the bankruptcy context.
See supra note 5; see also infra sec. II.C.7. (petitioners’
“likelihood of occurrence” test). The broad reach of the
insolvency exclusion, however, indicates that Congress recognized
the significant differences between a debtor coming out of
bankruptcy and an insolvent debtor outside of bankruptcy and
realized that different avenues of excluding income from
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