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v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof may
shift to the Commissioner under section 7491 in certain
circumstances. See Prince v. Commissioner, T.C. Memo. 2003-247.
The issue in this case is a question of law and does not depend
on which party has the burden of proof.
A. Discharge of Indebtedness
Gross income includes all income from whatever source
derived. Sec. 61(a). Discharge of indebtedness is specifically
included as an item of gross income. Sec. 61(a)(12). This means
that a taxpayer who has incurred a financial obligation, which
obligation is later discharged or released, has realized an
accession to income. Sec. 61(a)(12); United States v. Kirby
Lumber Co., 284 U.S. 1, 3 (1931); Friedman v. Commissioner, 216
F.3d 537, 545 (6th Cir. 2000), affg. T.C. Memo. 1998-196. The
rationale of this principle is that the discharge of a debt below
the face value of the debt accords the debtor an economic benefit
equivalent to income. Friedman v. Commissioner, 216 F.3d at 545.
The treatment of discharge-of-indebtedness income parallels
the Code's treatment of loans. Toberman v. Commissioner, 294
F.3d 985, 988 (8th Cir. 2002), affg. in part and revg. in part
T.C. Memo. 2000-221. Borrowed funds are not included in a
taxpayer’s income. Nor are repayments of a loan deductible from
income. When, however, one’s obligation to repay the funds is
settled for less than the amount of the loan, one ordinarily
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