Federal Home Loan Mortgage Corporation - Page 37

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                    4.   Petitioner’s Purchase of Its Debt Obligations                
                         Would Result in Discharge of Indebtedness Income             
               Respondent appears to argue that the only way petitioner               
          could realize the value of favorable financing would be to buy              
          back its debt instruments at their discounted market prices.                
          Respondent claims that this is impractical because petitioner               
          would incur tax on the resulting discharge of indebtedness                  
          income.                                                                     
               When a taxpayer repays a debt at a discount, the taxpayer              
          normally realizes income from the discharge of indebtedness.  See           
          sec. 61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1, 3            
          (1931).  Section 1.61-12(a), Income Tax Regs., provides that “The           
          discharge of indebtedness, in whole or in part, may result in the           
          realization of income.  * * *  A taxpayer may realize income by             
          the payment or purchase of his obligations at less than their               
          face value.”  When a taxpayer receives borrowed funds, those                
          funds are excluded from income because the taxpayer has an                  
          obligation to repay the funds.  United States v. Centennial Sav.            
          Bank FSB, 499 U.S. 573, 582 (1991).  The rationale for including            
          discharge of indebtedness in a taxpayer’s income is that the                
          taxpayer “realizes an accession to income due to 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 at 3).                                              







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