- 5 -
Court, the general theory is that to the extent that a taxpayer
has been released from indebtedness, the taxpayer has realized an
accession to income because the cancellation of indebtedness
effects a freeing of assets previously offset by the liability
arising from such indebtedness. United States v. Kirby Lumber
Co., 284 U.S. 1 (1931); see Cozzi v. Commissioner, 88 T.C. 435,
445 (1987). Thus, petitioner’s argument that he did not benefit
economically from the cancellation of his indebtedness to Mellon
Bank is simply not correct.
A discharge of indebtedness generally produces income in an
amount equal to the difference between the amount due on the
obligation and the amount paid for the discharge. If no
consideration is paid for the discharge, then the entire amount
of the debt is considered the amount of income that the debtor
must include in income. Sec. 61(a)(12). In the present case,
the amount owed by petitioner to Mellon Bank at the time of the
discharge was $5,513, and the amount paid by petitioner to Mellon
Bank for the discharge was $0. Accordingly, the amount that
petitioner must include in income is $5,513, as determined by
respondent.
Admittedly, there are both statutory and common law
exceptions to the rule requiring the recognition of income from
the discharge of indebtedness. E.g., sec. 108(a), Zappo v.
Commissioner, 81 T.C. 77, 85-86 (1983). Thus, for example, gross
Page: Previous 1 2 3 4 5 6 7 8 Next
Last modified: May 25, 2011