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for income tax. Higbee v. Commissioner, 116 T.C. 438, 442
(2001).
Gross income includes all income from whatever source
derived, including but not limited to discharge of indebtedness.
Sec. 61(a)(12); sec. 1.61-12(a), Income Tax Regs. A discharge of
indebtedness generally produces income in an amount equal to the
difference between the amount due on the obligation and the
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 United States Supreme Court, 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).
Debt is deemed discharged the moment it becomes clear that
the debt will never have to be paid. Cozzi v. Commissioner,
supra at 445. The test for determining when this moment occurs
requires an assessment of the facts and circumstances surrounding
the likelihood of repayment. Id. “Any ‘identifiable event’
which fixes the loss with certainty may be taken into
consideration.” Id. (quoting United States v. S.S. White Dental
Manufacturing Co., 274 U.S. 398, 401 (1927)).
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