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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).
The treatment of discharge of indebtedness income parallels
the Internal Revenue 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.
Petitioner does not challenge the principle that discharge
of indebtedness constitutes gross income. His sole argument is
that he was insolvent at the time he 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 amounts that would be includable in
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