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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.
Discussion
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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Last modified: May 25, 2011