- 5 -
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
Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011