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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Last modified: November 10, 2007