Purpose: To determine the excess of a taxpayer’s liabilities over the fair market value of the taxpayer’s assets before the discharge of indebtedness.

Code Section 108(d)(3) defines insolvency as the excess of a taxpayer’s liabilities over the fair market value of the taxpayer’s assets immediately before the discharge of indebtedness. The level of insolvency determines the maximum amount of indebtedness forgiven by a creditor that a taxpayer can exclude from gross income for tax purposes. The determination of insolvency is a valuation matter and requires the fair market value appraisal of all of the taxpayer’s assets, including tangible and intangible assets, immediately before the discharge of indebtedness.