In the case of Hamilton v. Commissioner, TC Memo 2018-62, the taxpayer had excluded from income cancellation of indebtedness of $158,511. The taxpayers claimed they qualified for the insolvency exclusion under IRC §108(a)(1)(B), with liabilities in excess of assets at the time of the discharge of $165,871. But the IRS objected that they had omitted from their calculation of insolvency a significant asset—a savings account held by their son that had been funded by the taxpayers and which the taxpayers regularly used to pay personal expenses.
Under IRC §61(a)(12), a discharge of indebtedness is specifically called out as a type of gross income subject to tax. However, IRC §108 provides that, in a number of specific circumstances, a taxpayer is able to exclude from income some or all of the discharge.
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