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Discharge of Indebtedness
Gross income means all income from whatever source derived,
including income from discharge of indebtedness. See sec.
61(a)(12); sec. 1.61-12(a), Income Tax Regs. Section
108(a)(1)(C) excludes from gross income discharge of indebtedness
income if the indebtedness discharged is qualified farm
indebtedness. Petitioner bears the burden of proof with respect
to whether he is entitled to an exclusion. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
In order for income to be excluded under section
108(a)(1)(C), petitioner must prove: (1) The discharge was made
by a qualified person, see sec. 108(g)(1); (2) the indebtedness
was incurred directly in connection with the taxpayer’s operation
of the trade or business of farming, see sec. 108(g)(2)(A); and
(3) 50 percent or more of the taxpayer’s aggregate gross receipts
for the 3 taxable years preceding the taxable year in which the
discharge of such indebtedness occurs is attributable to the
trade or business of farming, see sec. 108(g)(2)(B). The
exclusion does not apply to a discharge to the extent the
taxpayer is insolvent. See sec. 108(a)(2)(B). Exclusions from
taxable income should be construed narrowly, and taxpayers must
bring themselves within the clear scope of the exclusion. See
Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998) (citing
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