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indebtedness is characterized not as taxable income but in effect
as a retroactive reduction of the purchase price. Where,
however, the only relationship between the parties is that of
debtor and creditor, “The rule of Kirby Lumber is clearly
applicable”. OKC Corp. & Subs. v. Commissioner, 82 T.C. 638, 647
(1984).
Petitioners argue that the lending of money in a generic
credit card transaction constitutes the sale of “property” under
section 108(e)(5). Petitioners are mistaken. MBNA effectively
lent petitioners money to be used for health care costs and
general living expenses.5 The only relationship between the
parties was that of debtor and creditor, and thus section
108(e)(5) does not apply. See OKC Corp. & Subs. v. Commissioner,
supra at 647.
II. Discharge of Indebtedness for Interest Payments
Petitioners also allege that no income arises from the
discharge of indebtedness for interest payments. In support of
this proposition, petitioners reference Earnshaw v. Commissioner,
T.C. Memo. 2002-191.
5 Insofar as petitioners used the credit card to buy
merchandise, the Commissioner treats debt forgiveness in third-
party lender cases as a purchase price adjustment only if the
forgiveness is directly related to an aspect of the sale, as
where a seller inflates the purchase price by misrepresentation.
Rev. Rul. 92-99, 1992-2 C.B. 35.
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