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exceed liabilities), i.e., whether assets are freed, as
a result of the debtor’s being discharged of indebted-
ness.
* * * * * * *
From our examination of the statutory language,
the legislative history, and the relevant cases cited
in the committee reports, we conclude that the analyti-
cal framework of the insolvency exclusion and its
related provisions [in section 108] is based on the
freeing-of-assets theory. * * *
A solvent debtor is capable of meeting his finan-
cial obligations because his assets equal or exceed his
liabilities. That excess (if any) is not increased
when an obligation that offsets assets is paid in full
because the reduction in liabilities is equal to the
reduction in assets. If the reduction in liabilities
exceeds the reduction in assets, then, under the
freeing-of-assets theory, the solvent debtor has real-
ized a gain to the extent of that excess. * * * Pursu-
ant to the freeing-of-assets theory, a debtor does not
realize income when discharged of a particular indebt-
edness, however, if his postdischarge liabilities equal
or exceed his postdischarge assets (if any); i.e.,
under the net assets test, the debtor’s liabilities
equal or exceed his assets after the discharge (or, the
statutory insolvency calculation shows that the debtor
is insolvent by an amount greater than or equal to the
discharge of indebtedness income * * *
Id. at 473-475; fn. ref. omitted.
With the foregoing in mind, we shall now consider petition-
ers’ argument that we follow Cole v. Commissioner, 42 B.T.A. 1110
(1940), in defining the word “assets” as used in the definition
of the term “insolvent” in section 108(d)(3).7 In Cole, the
7Petitioners also urge us to follow Hunt v. Commissioner,
T.C. Memo. 1989-335. Petitioners argue that we previously held
in Hunt that, for purposes of sec. 108(a)(1)(B), the word “as-
sets” in sec. 108(d)(3) does not include assets exempt from the
(continued...)
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