Michael Friedman and Madeline Friedman - Page 12

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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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