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II. Discharge of Indebtedness Income
Generally, discharge of indebtedness gives rise to gross
income to the obligor. See sec. 61(a)(12); sec. 1.61-12(a),
Income Tax Regs. The general rationale for this rule is that
discharge of indebtedness enriches the obligor by freeing up
assets otherwise needed to repay the debt. See United States v.
Kirby Lumber Co., 284 U.S. 1, 3 (1931); Milenbach v.
Commissioner, 106 T.C. 184, 202 (1996); Cozzi v. Commissioner, 88
T.C. 435, 445 (1987). A debt is deemed to be discharged as soon
as it becomes clear, on the basis of a practical assessment of
all the facts and circumstances, that it will never have to be
paid. See Cozzi v. Commissioner, supra at 445. Any identifiable
event that fixes with certainty the amount to be discharged may
be taken into consideration. See id. The event may or may not
be overt; “ultimately, it is the actions of the taxpayer in the
context of the circumstances of a case” that determine whether an
abandonment or discharge of indebtedness has taken place. Id. at
446. The taxpayer bears the burden of proving that there was no
valid debt, that a discharge of debt did not occur, and that the
year of the discharge determined by the Commissioner is
erroneous. See Rule 142(a); Waterhouse v. Commissioner, T.C.
Memo. 1994-467; Carlins v. Commissioner, T.C. Memo. 1988-79.
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