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In Hunt v. Commissioner, T.C. Memo. 1989-335, decided with
respect to a taxable year prior to the effective date of section
108(a)(1)(B) and (d)(3), we held, as petitioners wish us to hold
today, that assets exempt from the claims of creditors by State
law were excluded from the definition of assets for purposes of
determining whether a nonbankrupt debtor was insolvent. This
entailed our holding that exempt assets included assets that, in
the event of bankruptcy, would be protected from the reach of
creditors under State exemptions, and not Federal exemptions,
even though (1) State law permitted debtors to elect either State
exemptions or Federal exemptions, and (2) Federal exemptions
would be more beneficial. In furtherance of this holding, we
noted:
While this conclusion may lead to different results for
taxpayers who actually file for bankruptcy and those who do
not, we note that different answers also result from those
debtors who file for bankruptcy and reside in different
states. The reason for the lack of consistency is twofold.
First, the Federal exemptions must be elected. Second, many
states do not allow their residents to choose Federal
exemptions over those offered by the state. Therefore, no
matter what path we choose today [in deciding whether state
exemptions or Federal exemptions are to be used], we still
cannot guarantee nationwide uniformity in determining which
assets are exempt from the claims of creditors when making a
determination of solvency. [Fn. ref. omitted.]
Excluding assets exempt under State bankruptcy law from the
section 108 definition of assets would result in inconsistencies
among taxpayers in different States that have different exemption
categories or amounts, another anomaly. In any event, section
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