- 9 -
from the transaction. Martin v. United States, 159 F.3d 932, 935
(5th Cir. 1998).
Generally, proceeds of a loan do not constitute income to a
borrower because the benefit is offset by an obligation to repay.
United States v. Rochelle, 384 F.2d 748, 751 (5th Cir. 1967)
(citing James v. United States, 366 U.S. 213, 219 (1961)); Arlen
v. Commissioner, 48 T.C. 640, 648 (1967). Loans do not result in
realized gains or enrichment because any increase in net worth
from proceeds of a loan is offset by a corresponding decrease in
net worth attributed to the obligation to repay the loan; i.e.,
there is no accretion to wealth. Collins v. Commissioner, 3 F.3d
625, 630 (2d Cir. 1993), affg. T.C. Memo. 1992-478.
In the event the obligation to repay the loan is canceled or
forgiven, income from the discharge of the indebtedness generally
is included in gross income at the time of discharge. Sec.
61(a)(12). The gain to the debtor from the discharge of
indebtedness is the resultant freeing up of his assets that he
would otherwise have been required to use to pay the debt.
United States v. Kirby Lumber Co., 284 U.S. 1 (1931). This
principle applies to both recourse and nonrecourse loans.
Commissioner v. Tufts, 461 U.S. 300, 308-309 & n.5 (1983); Crane
v. Commissioner, 331 U.S. 1, 13-14 (1947).
Petitioner contends that the $175,000 received from Amoco
was a loan and, therefore, not taxable income when received in
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011