- 42 -
1994, and consequently only $900,000 is includible in petitioners'
1994 income under respondent's alternative determination.30
Section 61(a) states that, unless otherwise provided: "gross
income means all income from whatever source derived". Included
within this broad definition is income from the discharge of
indebtedness, which occurs when a taxpayer is released from his
indebtedness or the indebtedness is satisfied for less than its
face amount. Sec. 61(a)(12); United States v. Kirby Lumber Co.,
284 U.S. 1 (1931); Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).
The theory underlying discharge of indebtedness income is that
loan proceeds previously untaxed because offset by a repayment
obligation are freed up when the obligation is eliminated without
payment, resulting in an accession to income. United States v.
Kirby Lumber Co., supra at 3. Whether a debt has been discharged
is dependent on the substance of the transaction. Cozzi v.
Commissioner, supra.
30 On brief, respondent also asserts as an alternative
argument that petitioners must recognize the income under the
principles of Old Colony Trust Co. v. Commissioner, 279 U.S. 716
(1929), because petitioner's obligation to repay Huntington was
discharged by a third party; namely, the Rapp Group. Respondent
also cites sec. 1.61-14(a), Income Tax Regs., to support the
alternative determination of income. However, the determination
in the notice of deficiency, maintained in the answer, was that
petitioners were required to recognize "forgiveness of debt"
income. Respondent has not sought to amend the pleadings to
assert any theory beyond forgiveness of indebtedness income, and
we decline to allow him to do so for the first time on brief.
See, e.g., Smalley v. Commissioner, 116 T.C. 450, 456 (2001).
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