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gross income as reported on their joint 1995 Federal income tax
return.4
Notice of Deficiency
By notice of deficiency, respondent determined that $314,257
of the $405,815 discharged debt should be included in
petitioners’ 1995 income.5
Discussion
Generally, discharge of indebtedness gives rise to gross
income to the obligor. Sec. 61(a)(12); see Gitlitz v.
Commissioner, 531 U.S. 206, 213 (2001). Section 108 provides
certain exceptions to this general rule. Pursuant to one of
these exceptions, income from discharge of indebtedness is
excluded from gross income if “the discharge occurs in a title 11
case”. Sec. 108(a)(1)(A). This provision is applied at the
partner level. Sec. 108(d)(6). Consequently, the relevant
question is whether petitioner’s debt (as opposed to the
partnership’s debt) was discharged “in a title 11 case.”
4 Petitioners attached to their 1995 Federal income tax
return Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Adjustment) (Form 982). On
the Form 982, petitioners excluded $380,699 of petitioner
husband’s allocable share of discharged debt pursuant to the
insolvency exception provided in sec. 108(a)(1)(B) and (3).
Petitioners challenge the treatment of this discharged debt only
to the extent of respondent’s deficiency determination set forth
in the notice of deficiency.
5 Respondent determined that petitioners were insolvent to
the extent of $91,558 immediately before Notchcliff Associates’
debt was discharged and that, accordingly, petitioners were
entitled to exclude from gross income $91,558 of the discharged
debt pursuant to sec. 108(a)(1)(B) and (3).
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Last modified: May 25, 2011