Section 16.2 General Rules

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

A. (§16.2) General Rules

When taxpayers borrow money, they are not required to include the loan proceeds in gross income because they have a corresponding obligation to pay the loan proceeds back to the lender and, therefore, have not experienced an accession to wealth. See Toberman v. Comm’r, 294 F.3d 985, 988 (8^th Cir. 2002); Allan v. Comm’r, 856 F.2d 1169, 1173 (8^th Cir. 1988) (citing Comm’r v. Tufts, 461 U.S. 300, 307–09 (1983)). But if a lender subsequently discharges a loan for less than its face amount, the taxpayer whose loan was discharged must include the discharged indebtedness in gross income. United States v. Kirby Lumber Co.,
284 U.S. 1, 3 (1931); see also I.R.C. § 61(a)(12). This amount, generally referred to as discharge-of-indebtedness income, must be included on the taxpayer’s federal income tax return as ordinary income rather than capital gain. Bressi v. Comm’r, 62 T.C.M. (CCH) 1668, 1674–75 (1991); H.R. Rep...