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income.
Petitioners claim that they were insolvent at the time of
the discharge, and, therefore, the amount of debt forgiven is
excludable from their 2002 income. See sec. 108(a)(1)(B).
For purposes of section 108(a)(1)(B) the term “insolvent”
means “the excess of liabilities over the fair market value of
assets” as determined “immediately before the discharge.” Sec.
108(d)(3). Respondent acknowledges that petitioners were
insolvent to the extent of $21,790.59 immediately before the
discharge. Nevertheless, relying upon an inapplicable regulation
and precedent from a case superseded by the enactment of section
108(a)(1)(B),4 respondent argues that “in order to qualify for
the insolvency exception, the taxpayer must be insolvent both
immediately before and immediately after the discharge of
indebtedness.” Respondent points out that petitioners have
failed to establish that they were insolvent immediately
following the discharge and argues that the provisions of section
108(a)(1)(B) do not apply. Petitioners’ financial status
immediately after the discharge, although disputed by the
parties, is, simply put, not relevant.
Turning our attention to petitioners’ financial status
immediately before the discharge, and otherwise ignoring various
4 Sec. 108 was amended by the Bankruptcy Tax Act of 1980,
Pub. L. 96-589, sec. 2(a), 94 Stat. 3389.
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