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includable in gross income by reason of the discharge of
indebtedness of the taxpayer if the discharge occurs when the
taxpayer is insolvent. The amount of this income excluded under
section 108(a)(1)(B) is not to exceed the amount by which the
taxpayer is insolvent. Sec. 108(a)(3). The term “insolvent” is
defined in section 108(d)(3) as:
Insolvent.--For purposes of this section, the term
“insolvent” means the excess of liabilities over the
fair market value of assets. With respect to any
discharge, whether or not the taxpayer is insolvent,
and the amount by which the taxpayer is insolvent,
shall be determined on the basis of the taxpayer’s
assets and liabilities immediately before the
discharge.
A taxpayer claiming the benefit of the insolvency exception must
prove: (1) With respect to any obligation claimed to be a
liability, that, as of the calculation date, it is more probable
than not that he will be called upon to pay that obligation in
the amount claimed; and (2) that the total liabilities so proved
exceed the FMV of his assets. Merkel v. Commissioner, 109 T.C.
463, 484 (1997), affd. 192 F.3d 844 (9th Cir. 1999).
We note section 108(e)(1) provides that, “there shall be no
insolvency exception from the general rule that gross income
includes income from the discharge of indebtedness” except as
provided in section 108, eliminating any judicially created
exceptions to the general rule of income from discharge of
indebtedness. See Carlson v. Commissioner, 116 T.C. 87, 100
(2001).
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Last modified: May 25, 2011