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of section 108(d)(3). The only such exempt property in this case
is petitioners’ house. The fair market value of petitioners’
house immediately before any discharge of indebtedness was
$335,110. Petitioners’ house was encumbered by a mortgage in the
amount of $189,354.
If petitioners’ house is included as an asset (and the
encumbering debt is included as a liability) in the insolvency
calculation, then petitioners were not insolvent either before or
after the forgiveness of debt,2 and such discharge of indebtedness
is includable in their gross income. If, on the other hand, the
house is not included as an asset (and any debt thereon is not
included as a liability), then petitioners were insolvent both
before and after the forgiveness of debt (on both the February
and May occasions), and the discharge of indebtedness is not
includable in their gross income.
In Carlson v. Commissioner, 116 T.C. 87 (2001), after a
thorough examination of the statutory history of section 108,
this Court found that Congress chose not to define insolvent to
exclude exempt assets. We held that the word “assets” as used in
section 108(d)(3) includes assets exempt from the claims of
creditors under applicable State law. Petitioners argue that our
2This would be the case whether the February or May occasion
is considered.
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