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Generally, when a solvent debtor's fixed obligation is
reduced or canceled, the amount of the reduction or cancellation
constitutes income. Sec. 61(a)(12); United States v. Kirby
Lumber Co., supra. In Earnshaw v. Commissioner, supra, we
concluded that there had been a legitimate dispute between the
debtor and creditor regarding the amount of the debtor’s
obligation. We held that the taxpayer recognized discharge of
indebtedness income from the settlement, but the amount was based
on the account balance that the taxpayer admitted to rather than
the higher amount the Commissioner alleged. Earnshaw does not
stand for the principle that discharge of indebtedness income
does not include the cancellation of debt attributable to
interest payments.
As no exclusion applies and the amount of petitioners’
obligation was clearly fixed, petitioners should have included
$16,678 of discharge of indebtedness income in their gross income
on their 2004 tax return.
In reaching this holding, the Court has considered all
arguments made and, to the extent not mentioned, concludes that
they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.
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Last modified: March 27, 2008