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of indebtedness.3 Sec. 61(a)(12); Vukasovich, Inc. v.
Commissioner, 790 F.2d 1409, 1413-1414 (9th Cir. 1986), affg. in
part and revg. in part T.C. Memo. 1984-611.
Income from the discharge of indebtedness results from the
release of a taxpayer from an obligation to repay a debt that
causes "a net increase in assets equal to the forgiven portion of
the debt". United States v. Centennial Sav. Bank FSB, 499 U.S.
573, 582 (1991); Commissioner v. Tufts, 461 U.S. 300, 310 n.11
(1983) (the doctrine relies on a freeing-of-assets theory to
attribute ordinary income to the debtor upon cancellation);
United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931);4 Cozzi
v. Commissioner, 88 T.C. 435, 445 (1987) (an accession to income
due to a freeing of assets).
Petitioner's discharge of indebtedness income is the result
of the freeing of his assets from obligations by the BIA in
3Depending upon the solvency of the taxpayer and the source
or use of the funds borrowed, an amount of income from discharge
of indebtedness may be deferred or excluded from income under
sec. 108. Petitioner has not raised exclusion under sec. 108,
and the record does not support one.
4In an earlier case, Bowers v. Kerbaugh-Empire Co., 271 U.S.
170, 175 (1926), forgiveness of indebtedness was described as a
transaction that "did not result in gain from capital and labor,
or from either of them, or in profit gained through the sale or
conversion of capital." See discussion in Vukasovich, Inc. v.
Commissioner, 790 F.2d 1409, 1414-1415 (9th Cir. 1986), affg. in
part and revg. in part T.C. Memo. 1984-611.
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