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1994, or, alternatively, in 1988. We agree and sustain
respondent’s determination that the Bensons’ debt was forgiven in
1994. “Income from discharge of indebtedness" is included within
the broad definition of income. See sec. 61(a)(12). “The
underlying rationale for such inclusion is that to the extent a
taxpayer is released from indebtedness, he or she realizes an
accession to income due to the freeing of assets previously
offset by the liability.” Jelle v. Commissioner, 116 T.C. 63, 67
(2001) (citing United States v. Kirby Lumber Co., 284 U.S. 1, 3
(1931)). In July 1994, Bradac stated to Burton that without an
explanation such unpaid loans constituted income in the year the
indebtedness was discharged. ERG filed its 1988 tax return on
August 1, 1994. Burton’s indebtedness was discharged in 1994
when it was eliminated from ERG’s return. It was at that
“‘moment it * * * [became] clear that a debt will never have to
be paid, such debt must be viewed as having been discharged.’”
Rinehart v. Commissioner, T.C. Memo. 2002-71 (quoting Cozzi v.
Commissioner, 88 T.C. 435, 445 (1987)). Accordingly, we find and
hold that Burton had cancellation of indebtedness income of
$88,291 in 1994.
3. Partner Expenses--Baden Spiel Haus Partnership
Burton was a 25-percent partner in the Baden Spiel Haus
partnership, which owned and operated a ski cabin in California.
Respondent determined that the Bensons were not entitled to
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