116 T.C. No. 9
UNITED STATES TAX COURT
RODERICK E. CARLSON AND JEANETTE S. CARLSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12068-99. Filed February 23, 2001.
Ps, husband and wife, purchased a fishing vessel
(vessel). They financed that purchase by borrowing
money from a bank. As security for the loan, Ps grant-
ed the bank a mortgage interest in the vessel. Ps
became delinquent in making payments to the bank on the
loan, and the bank foreclosed on the vessel, sold it as
part of that foreclosure, used the proceeds from that
sale to reduce the outstanding principal balance of the
loan, and discharged the remaining balance of the loan.
As a result, Ps realized capital gain of $28,621 and
discharge of indebtedness (DOI) income of $42,142.
Ps excluded the DOI income from their gross income
pursuant to the insolvency exception of sec.
108(a)(1)(B), I.R.C., because they determined that they
were insolvent within the meaning of sec. 108(d)(3),
I.R.C. In making the insolvency calculation prescribed
by sec. 108(d)(3), I.R.C., Ps excluded certain assets
that they claim are exempt from the claims of creditors
under applicable State law. The parties agree that if
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