Section of Taxation Publications
  VOL. 55
NO. 1
FALL 2001
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
An Examination of the Section 108 Statutory Insolvency Exclusion and Its Definition of "Assets" as Applied in Carlson v. Commissioner
Saidah M. Grayson


In Carlson v. Commissioner the Tax Court held that Roderick E. Carlson, a commercial fisherman, and his wife Jeannette Carlson (the “taxpayers”) could not exclude discharge of indebtedness (DOI) income from gross income under the statutory insolvency exclusion of section 108(a)(1)(B). Holding that the term “assets,” as used in section 108(d)(3), includes assets exempt from creditors under state law, the court rejected the taxpayers’ contention that they were “insolvent” within the meaning of sections 108(a)(1)(B) and 108(d)(3). The Tax Court’s broad interpretation of the term “assets” in the calculation of insolvency with respect to excluding DOI income under the statutory insolvency exclusion disregards a common law interpretation of the insolvency exception (which excluded assets exempt from state creditors from the insolvency calculation), previously thought to be applicable after the enactment of section 108.

Part I of this Note discusses the common law evolution of the insolvency exception and its subsequent statutory codification in section 108. Part II details the facts of the case, and Part III summarizes the taxpayers’ argument. Part IV discusses the opinion of Tax Court. Part V analyzes the Tax Court’s limitation of the common law influence on the interpretation of the terms within section 108 and the insolvency exception. In conclusion, Part VI argues that the court’s strict interpretation directly conflicts with the underlying spirit of the “fresh start” provisions of the Bankruptcy Tax Act of 1980 (“Bankruptcy Tax Act”).


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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