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amount paid for the discharge. See Babin v. Commissioner, 23
F.3d 1032, 1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.
As explained by the Supreme Court of the United States, the
general theory is that to the extent that a taxpayer has been
released from indebtedness, the taxpayer has realized an
accession to income because the cancellation of indebtedness
effects a freeing of assets previously offset by the liability
arising from such indebtedness. United States v. Kirby Lumber
Co., 284 U.S. 1, 3 (1931); see Cozzi v. Commissioner, 88 T.C.
435, 445 (1987). If, however, the cancellation of all or part of
a debt is made in settlement of a dispute concerning the debt, no
income from cancellation of indebtedness arises. N. Sobel, Inc.
v. Commissioner, 40 B.T.A. 1263, 1265 (1939); Exch. Sec. Bank v.
United States, 345 F. Supp. 486, 490-491 (N.D. Ala. 1972), revd.
on other grounds 492 F.2d 1096 (5th Cir. 1974); see Colonial Sav.
Association v. Commissioner, 85 T.C. 855, 862-863 (1985), affd.
854 F.2d 1001 (7th Cir. 1988). Settlement in such circumstances
does not occasion a freeing of assets and accession to income.
N. Sobel, Inc. v. Commissioner, supra at 1265.
As a general rule, the Commissioner’s determinations are
presumed correct, and the taxpayer bears the burden of proving
that those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). This rule, however, is
subject to the provisions of section 7491(a), under which the
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