Gilbert Hahn, Jr. and Margot H. Hahn - Page 7

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          obligation.  Secondly, petitioner argues in the alternative that            
          payment of the related items would have given rise to a deduction           
          as ordinary and necessary business expenses of his horse breeding           
          and training activity.                                                      
          I.   Whether forgiveness of the related items could give rise to            
               discharge of indebtedness income                                       
               Section 61(a)(12) provides that gross income includes income           
          from the discharge of indebtedness.  The amount of income                   
          includable generally is the difference between the face value of            
          the debt and the amount paid in satisfaction of the debt.  Babin            
          v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), affg. T.C.             
          Memo. 1992-673.  The underlying rationale for such inclusion is             
          that, to the extent a taxpayer is released from indebtedness, the           
          taxpayer realizes an accession to income due to the freeing of              
          assets previously offset by the liability.  See United States v.            
          Kirby Lumber Co., 284 U.S. 1, 3 (1931); Jelle v. Commissioner,              
          116 T.C. 63, 67 (2001).                                                     
               Petitioner contends that the Kirby Lumber Co. rationale does           
          not apply to the related items because he did not receive cash or           
          other property when he incurred a liability for such items.                 
          Petitioner argues that the forgiveness of the obligation                    
          therefore did not result in a freeing of assets.  We disagree.              
               A taxpayer may realize income upon the discharge of an                 
          obligation even though the taxpayer has not directly received               
          cash or other property.  In Old Colony Trust Co. v. Commissioner,           

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