- 7 - 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,Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 NextLast modified: November 10, 2007