-30-
indebtedness income, respondent fails to recognize that the
apparent inconsistency may be an inconsistency in policy.
As Congress enacted the insolvency exclusion, it eliminated
the net assets test as a judicially created exception to the
general rule of income from the discharge of indebtedness. See
sec. 108(e)(1).16 The fundamental difference between the
insolvency exclusion and the net assets test is that the
insolvency exclusion is applicable only if there exists income
from the discharge of indebtedness, whereas the net assets test
engages in the threshold inquiry. Therefore, unlike the net
assets test, the insolvency exclusion does not necessarily invade
the province of section 61(a)(12).
Essentially, the insolvency exclusion defers to section
61(a)(12) as to the definition of the term “gross income”, but
represents a policy judgment that certain of that income should
not give rise to an immediate tax liability. The relevant
committee reports intimate that the policy judgment underlying
16 Cf. Bittker & McMahon, Federal Income Taxation of
Individuals, par. 4.5, at 4-26 (2d ed. 1995) (“by virtue of
� 108(e)(1), � 108(a)(1) now preempts the field, precluding any
other `insolvency exception.' This attempt to outlaw judge-made
insolvency exceptions is technically flawed because it applies
only if the taxpayer realizes `income from the discharge of
indebtedness' and, hence, does not help in determining whether a
transaction by an insolvent debtor generates any income. The
message will be heeded, however, even though the draftsman
blundered.” (fn. ref. omitted)). It appears, however, that the
draftsman did not blunder because sec. 108(e)(1) applies for
purposes of title 26 of the United States Code (the Internal
Revenue Code) without regard to sec. 108(a)(1).
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