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There are several exceptions to the general rule
of income realization. Under a judicially developed
“insolvency exception,” no income arises from discharge
of indebtedness if the debtor is insolvent both before
and after the transaction;1 and if the transaction
leaves the debtor with assets whose value exceeds
remaining liabilities, income is realized only to the
extent of the excess.2 * * *
1Treas. Regs. � 1[.]61-12(b)(1); Dallas Transfer &
Terminal Warehouse Co. v. Comm’r, 70 F.2d 95 (5th Cir.
1934).
2Lakeland Grocery Co., 36 B.T.A. 289 (1937).
S. Rept. 96-1035, supra, 1980-2 C.B. at 623; see H. Rept. 96-833,
supra at 7.
We shall discuss in greater detail the three cases referred
to in the foregoing excerpt of the committee reports accompanying
H.R. 5043. In United States v. Kirby Lumber Co., 284 U.S. 1
(1931), the Supreme Court of the United States (Supreme Court)
established the rule that a debtor realizes (and must recognize)
income when discharged of indebtedness, i.e., when relieved of
indebtedness without full payment of the amount owed. In Kirby
Lumber Co., the taxpayer had issued bonds for which it received
par value. In the same year, the taxpayer repurchased some of
those bonds in the open market for less than their par value
issue price. See id. at 2. The Supreme Court held that the
taxpayer must recognize income in an amount (i.e., $137,521.30)
equal to the difference between the issue price and the repur-
chase price of the bonds in question. See id. at 2, 3. In so
holding, the Supreme Court reasoned: “As a result of its [tax-
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