Henry B. and Angela E. Davis Martins - Page 6

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          that the discharge of a debt affects 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).                                                                     
               The treatment of discharge of indebtedness income parallels            
          the Code’s treatment of loans.  Toberman v. Commissioner, 294               
          F.3d 985, 988 (8th Cir. 2002), affg. in part and revg. in part              
          T.C. Memo. 2000-221.  Borrowed funds are not included in a                  
          taxpayer’s income.  Nor are repayments of a loan deductible from            
          income.  When, however, an obligation to repay a loan is                    
          settled for less than the amount of the loan, one ordinarily                
          realizes income from discharge of indebtedness.  Sec. 61(a)(12);            
          Warbus v. Commissioner, 110 T.C. 279, 284 (1998) (citing                    
          Vukasovich, Inc. v. Commissioner, 790 F.2d 1409, 1413-1414 (9th             
          Cir. 1986), affg. in part and revg. in part T.C. Memo. 1984-611).           
          The difference between the face value of the debt and the amount            
          paid in satisfaction of the debt is includable in the taxpayer’s            
          gross income.  Babin v. Commissioner, 23 F.3d 1032, 1034 (6th               
          Cir. 1994), affg. T.C. Memo. 1992-673.                                      
               Accompanying the discharge of indebtedness income rule are             
          certain exclusions from gross income.  A taxpayer may exclude               
          from gross income a discharge from indebtedness if the discharge            
          occurs in a bankruptcy case or, alternatively, when the taxpayer            
          is insolvent, or if the indebtedness is a qualified farm or                 





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