- 4 -
derived. Sec. 61(a). Discharge of indebtedness is specifically
included as an item of gross income. Sec. 61(a)(12). This means
that a taxpayer who has incurred a financial obligation that is
later discharged or released has realized an accession to income.
United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); Friedman
v. Commissioner, 216 F.3d 537, 545 (6th Cir. 2000), affg. T.C.
Memo. 1998-196. The rationale of this principle is that the
discharge of a debt effects the freeing of assets previously
offset by the liability. Jelle v. Commissioner, 116 T.C. 63, 67
(2001) (citing United States v. Kirby Lumber Co., supra).
Petitioner does not challenge the principle that discharge
of indebtedness constitutes gross income. Her sole argument is
that she was insolvent at the time she was relieved of this
liability, and, therefore, the discharged indebtedness does not
constitute gross income. Under section 108(a)(1)(B), gross
income does not include any amount that would be includable in
gross income by reason of the discharge of the indebtedness of
the taxpayer if the taxpayer was insolvent at the time the
indebtedness was discharged.
On her Federal income tax return for 2001, the year at
issue, petitioner reported no wage or salary income or any other
income. She reported a business loss of $3,128 on a Schedule C.
That activity was identified as The All American Herbal Health
Clinic. In the notice of deficiency, respondent made no
Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011