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A discharge of indebtedness generally produces income in an
amount equal to the difference between the amount due on the
obligation and the amount paid for the discharge. If no
consideration is paid for the discharge, then the entire amount
of the debt is considered the amount that the debtor must include
in income. Sec. 61(a)(12).
There are both statutory and common law exceptions to the
rule requiring the recognition of income from the discharge of
indebtedness. E.g., sec. 108(a); Zappo v. Commissioner, 81 T.C.
77, 85-86 (1983). However, these exceptions do not apply to the
present case.
Petitioners state that the instructions in the Internal
Revenue Service (IRS) guidance booklet for filing a 1099-C
require that only the principal of a lending transaction be taken
into income as discharge of indebtedness income. Consequently,
petitioners argue that their outstanding credit card liability,
which included interest, operation charges, and penalties, should
be reduced pursuant to the instructions in the IRS guidance
booklet. The instructions on which petitioners rely are found in
the “2001 Instructions for Forms 1099-A and 1099-C”. The
pertinent instructions state, as follows:
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Last modified: May 25, 2011