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Petitioner stated: "If I have to pay income tax on the
portion the [companies] cancelled I will have learned one thing.
It does not pay to try and do the right [and] moral thing, just
file bankruptcy [and] clear your debts." Petitioners contend
that they should not have to include the $13,938 of discharged
debt in their income because they were insolvent in 1996.
Respondent contends that petitioners were not insolvent in 1996
because all of petitioners' property should be included in the
calculation of the fair market value of their "assets" under
section 108(d)(3), regardless of whether some property is exempt
from creditors' claims under State law.
Under section 61(a)(12), gross income includes "all income
from whatever source derived, including * * * income from
discharge of indebtedness". Under certain circumstances, a
taxpayer may exclude from gross income the income from discharge
of indebtedness if the discharge occurs when the taxpayer is
insolvent. Sec. 108(a)(1)(B). The exclusion cannot exceed the
amount by which the taxpayer is insolvent. Sec. 108(a)(3). For
purposes of this section, "insolvent" is defined as "the excess
of liabilities over the fair market value of assets." Sec.
108(d)(3). Such a determination is to be made on the basis of
the taxpayer's assets and liabilities immediately before the
discharge. Sec. 108(d)(3).
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Last modified: May 25, 2011