Gross income includes all income from whatever source

[David A. Szwak]

Gross income includes all income from whatever source derived, including but not limited to discharge of indebtedness. Sec. 61(a)(12); sec. 1.61-12(a), Income Tax Regs. A discharge of indebtedness generally produces income in an amount equal to the difference between the amount due on the obligation and the amount paid for the discharge. See Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir.1994), affg. T.C. Memo.1992-673. As explained by the United States Supreme Court, the general theory is that to the extent that a taxpayer has been released from indebtedness, the taxpayer has realized an accession to income because the cancellation of indebtedness effects a freeing of assets previously offset by the liability arising from such indebtedness. United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); see Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).

Debt is deemed discharged the moment it becomes clear that the debt will never have to be paid. Cozzi v. Commissioner, supra at 445. The test for determining when this moment occurs requires an assessment of the facts and circumstances surrounding the likelihood of repayment. Id. “Any ‘identifiable event’ which fixes the loss with certainty may be taken into consideration.â€