Cite as: 531 U. S. 206 (2001)
Opinion of the Court
Commissioner argues that § 108 merely codified the "judicial insolvency exception," and that, under this exception, discharge of indebtedness of an insolvent taxpayer was not considered income. The insolvency exception was a rule that the discharge of indebtedness of an insolvent taxpayer was not taxable income. See, e. g., Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 F. 2d 95 (CA5 1934); Astoria Marine Construction Co. v. Commissioner, 12 T. C. 798 (1949). But the exception has since been limited by § 108(e). Section 108(e) precludes us from relying on any understanding of the judicial insolvency exception that was not codified in § 108. And as explained above, the language and logic of § 108 clearly establish that, although discharge of indebtedness of an insolvent taxpayer is not included in gross income, it is nevertheless income.
The Commissioner also relies on a Treasury Regulation to support his theory that no income is realized from the discharge of the debt of an insolvent:
"Proceedings under Bankruptcy Act.
"(1) Income is not realized by a taxpayer by virtue of the discharge, under section 14 of the Bankruptcy Act (11 U. S. C. 32), of his indebtedness as the result of an adjudication in bankruptcy, or by virtue of an agreement among his creditors not consummated under any provision of the Bankruptcy Act, if immediately thereafter the taxpayer's liabilities exceed the value of his assets." 26 CFR § 1.61-12(b) (2000).
Even if this regulation could be read (countertextually) to apply outside the bankruptcy context, it merely states that
the corporation, see § 1363(a) (exempting an S corporation from income tax), but solely to pass through to the S corporation's shareholders the corporation's income. Thus, the controlling provision states that, in determining a shareholder's liability, "there shall be taken into account the shareholder's pro rata share of the corporation's . . . items of income (including tax-exempt income) . . . ." § 1366(a)(1). Nothing in § 108(d)(7)(A) suspends the operation of these ordinary pass-through rules.
215
Page: Index Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 NextLast modified: October 4, 2007