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discharge of indebtedness and the consequences thereof were
necessary and inevitable.
Title 11 of the United States Code (the Bankruptcy Code)
offers bankruptcy relief for various types of debtors. 1 Collier
on Bankruptcy, par. 1.03, at 1-21 (15th ed. Revised 1996).
Chapter 7 of the Bankruptcy Code governs liquidation of a debtor,
colloquially known as “straight bankruptcy”, and provides the
mechanism for “the collection, liquidation, and distribution of
the property of the debtor”, culminating in the discharge of the
debtor. 6 Collier on Bankruptcy, par. 700.01, at 700-1 (15th ed.
Revised 1996). Being thus relieved of his debts, the debtor
coming out of bankruptcy is accorded a fresh start. To preserve
that fresh start, the debtor pursuant to the bankruptcy exclusion
is not burdened with an immediate tax liability on account of
income from the discharge in bankruptcy of indebtedness.
For the insolvent debtor outside of bankruptcy, until (and
unless) all of his debts are settled or discharged, he is not in
the identical fresh start position as the debtor coming out of
bankruptcy. Section 108(d)(3) recognizes that fact and provides
for a calculation of insolvency and not an actual marshaling and
sale of assets followed by a satisfaction of debts. When
Congress codified the net assets test, see supra sec. II.C.2.,
the insolvency exclusion was made available to all insolvent
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