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S corporation's stock as a result of any COD income realized by
that corporation.
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
debtor because the assets are no longer encumbered. A
cancellation of indebtedness generally produces income to the
debtor in an amount equal to the difference between the amount
due on the obligation and the amount paid for the discharge. If
no consideration is paid for the discharge, then the entire
amount of the debt is considered the amount of income which the
debtor must include in income. Sec. 61(a)(12).
However, in some circumstances, COD income may be excluded.
Section 108(a)(1) reads as follows:
SEC. 108(a). Exclusion From Gross
Income.--
(1) In general.--Gross income does not include any
amount which (but for this subsection) would be
includible in gross income by reason of the discharge
(in whole or in part) of indebtedness of the taxpayer
if--
(A) the discharge occurs in a title 11
case, or
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