Estate of Michael Newman, Deceased, Sidney Newman, and Alice Newman, and Alice Newman v. Commissioner of Internal Revenue

WINTER, Circuit Judge:

A discharge of indebtedness for less than its face value is usually regarded as an economic benefit to the debtor and is, therefore, taxed as ordinary income. However, confusion as to the theoretical basis for taxing discharges of indebtedness has spawned an illogical, judge-made “insolvency exception” to the general rule. This exception allows a taxpayer who is insolvent to exclude from gross income the amount of forgiven debt except to the extent the forgiveness renders the taxpayer solvent.

The instant appeal presents the question of whether the insolvency exception…