Gehl v. Commissioner

James and Laura Gehl (plaintiffs), unable to repay a loan secured by their farm, transferred most of the farmland to their lender, who valued the land well above the Gehls' adjusted basis and reduced the loan balance accordingly, later writing off the remaining balance entirely. The IRS commissioner (defendant) treated the pure write-off as tax-exempt discharge-of-indebtedness income but treated the excess valuation used to reduce the loan as a separately taxable gain; the Gehls argued both amounts were tax-exempt since they remained insolvent and used both solely to repay the loan, but the Tax Court ruled against them, and they appealed.