Although binding on the IRS, revenue rulings are interpretive rulings by an administrative agency that do not require notice and comment and consequently are not binding on courts. See id.; see also Babin v. Comm'r of Internal Revenue, 23 F.3d 1032, 1038 (6th Cir. 1994) ("Revenue rulings are not binding on this court."). Nevertheless, as the informed opinion of a specialized agency, this Circuit has treated revenue rulings as having persuasive authority.
In 1954, Congress codified the discharge of indebtedness rule announced by the Supreme Court in United States v. Kirby Lumber Co., 284 U.S. 1 (1931). See 26 U.S.C. § 61(a)(12); Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994) ("In 1954, Congress codified the ruling in Kirby Lumber, specifically providing that gross income includes `[i]ncome from discharge of indebtedness.'"). In Kirby Lumber, a corporation issued its own bonds for $12,126,800 for which it received their par value.
In general, cancellation of indebtedness 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), aff'g T.C. Memo. 1992-673. The rationale for this principle is that cancellation of indebtedness provides the debtor with an economic benefit that is equivalent to income.
In the instant case, the principal controversy is whether petitioner is entitled to increase the basis in his S corporation stock pursuant to section 1366(a)(1) by his pro rata share of COD income. This issue is a question of law. Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir.1994), affg. T.C. Memo.1992–673. Section 61 requires that certain amounts be included in income.
Following careful review, see Campbell v. Comm'r, 164 F.3d 1140, 1142 (8th Cir. 1999) (standard of review for tax court decisions), we conclude that the tax court did not err in upholding the IRS's determination. See 26 U.S.C. § 61(a)(12) (gross income means all income from whatever source derived, including income from discharge of indebtedness); Babin v. Comm'r, 23 F.3d 1032, 1034 (6th Cir. 1994) (where debt owed by taxpayer is discharged, difference between face value of debt and amount paid in satisfaction of debt is includable in taxpayer's gross income under § 61(a)(12)); see also 26 C.F.R. § 1.6050P-1(c) (indebtedness means any amount owed to applicable entity, including stated principal, fees, stated interest, and penalties); Comm'r v. Nat'l Alfalfa Dehydrating Milling Co., 417 U.S. 134, 148, 94 S.Ct. 2129, 40 L.Ed.2d 717 (1974) (transaction is to be given tax effect in accord with what actually occurred and not in accord with what might have occurred); Preslar v. Comm'r, 167 F.3d 1323, 1331 (10th Cir. 1999) (§ 108(e)(5) permits taxpayers to reflect debt reduction by adjusting basis of their property rather than recognizing immediate gain as cancellation of indebtedness; § 108(e)(5) applies only to direct agreements between purchaser and seller). Accordingly, we affirm.
ECF No. 25–6 at 13. See, e.g. , Babin v. C.I.R. , 23 F.3d 1032, 1035 (6th Cir. 1994) (citing Gershkowitz v. Commissioner , 88 T.C. 984, 1005, 1987 WL 49310 (1987) ) ("Under the insolvency exception, "a debtor will not recognize income under section 61(a)(12) if he is insolvent following the discharge of indebtedness."). This process would, in turn, require the issuance of an "affected items statutory notice of deficiency."
Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 978 (7th Cir. 1998). Babin v. C.I.R., 23 F.3d 1032, 1038 (6th Cir. 1994) ("However, we need not accord a revenue ruling any deference, where, as here, the revenue ruling fails to address the relevant issue on appeal."). Treas. Reg. § 601.601(d)(2)(v)(a)); 26 C.F.R. § 601.601.
The amount includible in income generally is the difference between the face value of the debt and the amount paid in satisfaction of the debt. Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), aff'g T.C. Memo. 1992-673. The income normally is recognized for the year the debt is canceled.
Sec. 61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1 (1931). A taxpayer is required to recognize COD income for the year the cancellation occurs, Montgomery v. Commissioner, 65 T.C. 511, 520 (1975), in an amount equal to the difference between the face value of the debt and the amount paid in satisfaction of the debt, Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), aff'g T.C. Memo. 1992-673; see Merkel v. Commissioner, 192 F.3d 844, 849 (9th Cir. 1999), aff'g 109 T.C. 463 (1997). The Code, however, provides an exception to the general rule of inclusion and will allow a taxpayer to presently exclude COD income from his or her gross income if the discharge of indebtedness occurs when the taxpayer is insolvent or if the debt discharged is "qualified principal residence indebtedness".
The amount includible in income generally is the difference between the face value of the debt and the amount paid in satisfaction of the debt. Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), aff'g T.C. Memo. 1992-673; Rios v. Commissioner, T.C. Memo. 2012-128, 2012 WL 1537910, at *4, aff'd, 586 F. App'x 268 (9th Cir. 2014). The income normally is recognized in the year the debt is canceled.