Sioana U. and S. Moli Ngatuvai - Page 5

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          income from the discharge of the loan.  The 2001 tax return                 
          listed petitioner Sioana U. Ngatuvai’s occupation as a “cook” and           
          petitioner S. Moli Ngatuvai’s occupation as a “carpenter”.                  
          Petitioners reported wages of $42,861,3 of which $9,054.97 was              
          withheld for Federal income tax, Social Security tax, Medicare              
          tax, and State income tax.                                                  
               As a general rule, the Internal Revenue Code imposes a tax             
          on the taxable income of every individual.  See sec. 1.  Section            
          61(a) defines gross income for purposes of calculating taxable              
          income as “all income from whatever source derived” and further             
          specifies that “Income from discharge of indebtedness” is                   
          included within this broad definition.  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.  See United States v. Kirby Lumber Co.,            
          284 U.S. 1, 3 (1931).                                                       
               Statutory exceptions to the above rule are set forth in                
          section 108.  Section 108(a) excludes from the operation of                 
          section 61(a) indebtedness (1) which is discharged in a title 11            
          case, (2) which is discharged when the taxpayer is insolvent, (3)           

               3  The Forms W-2, Wage and Tax Statement, indicate that                
          petitioners received wages of $42,638.20.                                   

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