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provable debts exceed the value of his surrendered assets.
The income tax statute does not purport to treat as income
what did not come within the meaning of that word before the
statute was enacted. * * * [Id.]
Section 108, Income from Discharge of Indebtedness, codifies
the result reached in Dallas Transfer, and identifies in
subsection (a), Exclusions From Gross Income, four occasions in
which discharge of indebtedness is not included in gross income.
The instant case involves the exception found in section
108(a)(1)(B), which provides:
(1) In general.--Gross income does not include any
amount which (but for this subsection) would be includible
in gross income by reason of the discharge (in whole or in
part) or indebtedness of the taxpayer if --
* * * * * * *
(B) the discharge occurs when the debtor is insolvent
* * *
The parties in this case do not agree on whether petitioners
were insolvent at the time the discharge of indebtedness
occurred. Resolution of the parties’ disagreement turns on the
calculation, for purposes of section 108(d)(3), of the value of
petitioners’ assets prior to the discharge of their debt to the
credit companies.
Insolvency is defined in section 108(d)(3) as “the excess of
liabilities over the fair market value of assets.” Petitioners
contend that property that would be exempt from creditors’ claims
under State law in bankruptcy proceedings is not taken into
account in determining the value of one’s “assets” for purposes
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Last modified: May 25, 2011