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petitioners have not identified the date or event by which New
Manchester realized COD income under section 61(a)(12) in that
year. On the other hand, petitioners contend that New Manchester
received a discharge of debt in a title 11 proceeding in 1992.
Specifically, petitioners infer that the appointment of a trustee
to supervise and carry out the sale of the corporate assets, the
collection of outstanding claims, and distributions to creditors
were undertaken by the bankruptcy court itself, or pursuant to
that court's approval. Consequently, petitioners suggest that
these actions taken as a whole constitute a "plan" within the
meaning of section 108(d)(2). Finally, for purposes of section
108(a)(2) (the insolvency exception), petitioners, in effect,
argue that it was a virtual certainty that New Manchester could
not make any payments, subsequent to 1992, to satisfy the
indebtedness.
Section 61 defines, in a general manner, gross income as
"all income from whatever source derived". Section 61(a)(12)
further elaborates on this broad language by providing that gross
income specifically includes amounts received from cancellation
of indebtedness. A taxpayer may realize COD income by paying an
obligation at less than its face value. United States v. Kirby
Lumber Co., 284 U.S. 1 (1931). The underlying rationale of this
principle is that a reduction in debt without a corresponding
reduction in assets causes an economic gain and income to the
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Last modified: May 25, 2011