-31-
the insolvency exclusion serves a humanitarian purpose--to avoid
burdening an insolvent debtor outside of bankruptcy with an
immediate tax liability, see supra sec. II.B.2. Even if there
exists some consistency in policy between section 61(a)(12) and
the insolvency exclusion, respondent's argument assumes that only
liabilities, the discharge of which gives rise to income, can
offset assets (which is the role of liabilities in the analytical
framework of the insolvency exclusion and its related
provisions). There is simply no basis for respondent's
assumption. In sum, nothing in the Code, the legislative history
of section 108, or any relevant authority requires an identity in
the class of obligations to pay for purposes of both the
statutory insolvency calculation and discharge of indebtedness
income under section 61(a)(12).17
7. Petitioners' “Likelihood of Occurrence” Test
As an alternative to the argument that the full amount of
both petitioners' guarantees and the State tax exposure should be
17 Cf. sec. 108(e)(2), which provides: “No income shall be
realized from the discharge of indebtedness to the extent that
payment of the liability would have given rise to a deduction.”
Congress did not provide that a sec. 108(e)(2) “liability” is not
a liability for purposes of the statutory insolvency calculation,
yet respondent's consistency argument leads to that conclusion.
In addition, to the extent that respondent's consistency
argument relates to consistency in determining the existence of
indebtedness and of liabilities, we believe that the standard set
forth supra sec. II.C.3. creates no inconsistency. Cf. Zappo v.
Commissioner, 81 T.C. 77, 89 (1983) (“The very uncertainty of the
highly contingent replacement obligation prevents it from
reencumbering assets freed by discharge of the true debt until
some indeterminable date when the contingencies are removed.”).
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