UNITED STATES TAX COURT


           RICHARD LEO WARBUS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent


Docket No. 2194-96.                     Filed April 21, 1998.



     P, a member of a federally recognized tribe of
American Indians, purchased a boat that he used in
treaty "fishing-rights-related" activity as defined in
sec. 7873, I.R.C. In 1984, P obtained a commercial
loan for items related to the fishing boat from the
same lender who financed the purchase of the boat. The
loan repayment was guaranteed by the Bureau of Indian
Affairs (BIA). When P failed to make payments on the
loan as they became due, the lender repossessed and
sold the boat. In 1993, pursuant to its loan guaranty,
the BIA paid to the lender outstanding principal and
interest, which it deemed uncollectible from P. As a
result of the BIA payment and cancellation of his debt,
P enjoyed discharge of indebtedness income in 1993. P
did not report discharge of indebtedness income,
believing it to be exempt from tax as income from
Indian fishing-rights-related activity as described in
sec. 7873.
                                   - 2 -


             Held: Discharge of indebtedness income received
        by P from the BIA is not excludable from income under
        sec. 7873 because it was not derived by P directly or
        through a qualified Indian entity from a fishing-
        rights-related activity.


        Daniel A. Raas, for petitioner.

        Christal W. Hillstead, for respondent.


                                  OPINION

        PARR, Judge:    This case was heard by Special Trial Judge

John F. Dean pursuant to section 7443A(b) and Rules 180, 181, and

182.1       The Court agrees with and adopts the opinion of the

Special Trial Judge which is set forth below.

                    OPINION OF THE SPECIAL TRIAL JUDGE

        DEAN, Special Trial Judge:    Respondent determined a

deficiency in petitioner's 1993 Federal income tax of $3,054 and

additions to tax of $763.50 under section 6651(a) and $127.92

under section 6654(a).       Petitioner concedes that he received

unreported rental income of $6,000 and nonemployee compensation

of $3,700 subject to self-employment tax, that he failed to file

a Federal income tax return for the year 1993, and that he did




        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended. All Rule references are to
the Tax Court Rules of Practice and Procedure.
                               - 3 -


not make estimated tax payments for the taxable year.2   The sole

issue for decision is whether certain discharge of indebtedness

income he received in the year 1993 is not subject to tax because

it is income derived from Indian fishing-rights-related activity.

     All of the facts of this case are contained in a Stipulation

of Facts that along with an attached exhibit is incorporated

herein by reference.

                            Background

     Petitioner resided in Bellingham, Washington, at the time

the petition was filed in this case.

     Petitioner was in 1993 and is still a member of the Lummi

Nation (nation), a federally recognized tribe of American

Indians.   The Lummi Nation is a signatory of the Treaty between

the United States and the Dwámish, Suquámish and other allied and

subordinate tribes of Indians in Washington Territory concluded

on January 22, 1855, at Point Elliott, Washington Territory, 12




     2
      Petitioner made no argument and presented no evidence to
show that his failure to file was due to reasonable cause and not
to willful neglect, nor did he argue or prove that his failure to
make estimated tax payments is excused because of a statutory
exception. We therefore deem these issues to be conceded by
petitioner. Rule 149(b); see Rothstein v. Commissioner, 

, 497 (1988); Cerone v. Commissioner, 

, 2 n.1 (1986).
                               - 4 -


Stat. 927 (1859), in which the nation reserved fishing rights at

all of its usual and accustomed fishing grounds and stations.

See also United States v. State of Washington, 

(9th

Cir. 1975).

     In or sometime before 1984, petitioner purchased a fishing

boat named the Denise W.   The boat purchase was financed through

a combination of a commercial loan and a promissory note given to

the former owners of the Denise W.

     In 1984 petitioner obtained a loan of $50,000 from the same

commercial lender that financed part of the boat purchase.     The

$50,000 was used to make a payment toward the purchase of a

salmon net, to make a payment on the note held by the former

owners of the Denise W, to make insurance and mortgage payments,

and for miscellaneous items.   The loan was guaranteed through a

Federal loan guaranty program administered by the Bureau of

Indian Affairs (BIA).

     Petitioner operated the Denise W in treaty fishing-rights-

related activities of the nation from about 1986 through 1991.

During that period petitioner was licensed to fish in waters

within the nation, and the Denise W was registered by the nation

for use in the treaty fishing-rights-related activities of the

nation.

     There came a time in or around the year 1993 when petitioner

did not make his loan payments as they became due.   As a result,
                                - 5 -


the Denise W was repossessed and sold by the commercial lender to

satisfy the unpaid loan amount.   The BIA in 1993, pursuant to its

loan guaranty, paid lenders a total of $13,506.88, of which

$5,589.45 was applied to principal and the balance to interest.

For the year 1993 petitioner was sent a Form 1099-G from the BIA

reporting income in the amount of $13,506 from the "discharge of

indebtedness".   Petitioner did not file a Federal income tax

return for the year 1993.

     The parties agree that petitioner is entitled to one

personal exemption and a standard deduction based on married-

filing-separate status for the year 1993.

                             Discussion

     It is petitioner's position that the income from discharge

of indebtedness he received in 1993 is not subject to tax because

it is income derived by an Indian from the exercise of fishing

rights under section 7873.

     Section 7873 provides in relevant part:

          SEC. 7873(a).   In General.--

               (1) Income and self-employment taxes.--No tax
          shall be imposed by subtitle A on income derived--

                      (A) by a member of an Indian tribe
                 directly or through a qualified Indian
                 entity, or

                      (B) by a qualified Indian entity,

          from a fishing rights-related activity of such tribe.
                         - 6 -


          (2) Employment taxes.--No tax shall be
     imposed by subtitle C on remuneration paid for
     services performed in a fishing rights-related
     activity of an Indian tribe by a member of such
     tribe for another member of such tribe or for a
     qualified Indian entity.

(b) Definitions.--For purposes of this section--

          (1) Fishing rights-related activity.--The
     term "fishing rights-related activity" means, with
     respect to an Indian tribe, any activity directly
     related to harvesting, processing, or transporting
     fish harvested in the exercise of a recognized
     fishing right of such tribe or to selling such
     fish but only if substantially all of such
     harvesting was performed by members of such tribe.

          (2) Recognized fishing rights.--The term
     "recognized fishing rights" means, with respect to
     an Indian tribe, fishing rights secured as of
     March 17, 1988, by a treaty between such tribe and
     the United States or by an Executive order or an
     Act of Congress.

          (3) Qualified Indian entity.--

               (A) In general.--The term "qualified
          Indian entity" means, with respect to an
          Indian tribe, any entity if--

                    (i) such entity is engaged in a
               fishing rights-related activity of such
               tribe,

                    (ii) all of the equity interests in
               the entity are owned by qualified Indian
               tribes, members of such tribes, or their
               spouses,

                    (iii) except as provided in
               regulations, in the case of an entity
               which engages to any extent in any
               substantial processing or transporting
               of fish, 90 percent or more of the
               annual gross receipts of the entity is
               derived from fishing rights-related
               activities of one or more qualified
                               - 7 -


                     Indian tribes each of which owns at
                     least 10 percent of the equity interests
                     in the entity, and

                          (iv) substantially all of the
                     management functions of the entity are
                     performed by members of qualified Indian
                     tribes.

     For purposes of clause (iii), equity interests owned by
     a member (or the spouse of a member) of a qualified
     Indian tribe shall be treated as owned by the tribe.

                     (B) Qualified Indian tribe.--For
                purposes of subparagraph (A), an Indian tribe
                is a qualified Indian tribe with respect to
                an entity if such entity is engaged in a
                fishing rights-related activity of such
                tribe.

     The parties agree that petitioner operated the Denise W in a

"fishing rights-related activity".     See sec. 7873(a)(1) and (2).

From this agreed starting point, petitioner argues that the

purchase of the Denise W and expenditures for associated

equipment and operating expenses are fishing-rights related and

that therefore the income from discharge of indebtedness incurred

to meet these expenses is fishing-rights related.

     Every item of a person's gross income is subject to Federal

income tax unless there is a statute or some rule of law that

exempts the person or the item from gross income.     HCSC-Laundry

v. United States, 

, 5 (1981).     Tax exemptions,

including those affecting native peoples, are not granted by

implication.   If Congress intends to exempt certain income, it

must do so expressly.   Earl v. Commissioner, 

, 1017
                               - 8 -


(1982); Lazore v. Commissioner, T.C. Memo. 1992-404, affd. in

part and revd. in part 

(3d Cir. 1993).

     Under section 7873, income derived by a member of an Indian

tribe "directly or through a qualified Indian entity" from a

"fishing rights-related activity of such tribe" is not subject to

income tax.   For purposes of section 7873, income derived from

"fishing rights-related activity" means income derived from

activity "directly related" to harvesting, processing,

transporting, or selling fish in the exercise of recognized

fishing rights of an Indian tribe.     Sec. 7873(b).

     In order for petitioner's argument to prevail, we must find

that his discharge of indebtedness income is derived from

activity "directly related" to harvesting, processing,

transporting, or selling fish in the exercise of recognized

fishing rights of an Indian tribe.     To make that determination,

we must examine the nature of petitioner's income.

     The income at issue results from petitioner's discharge of

indebtedness for funds he borrowed in part to purchase property

with which to engage in fishing-rights-related activity.     In or

around 1993 petitioner's creditor seized collateral to satisfy

part of his unpaid loan amount.   In 1993 the BIA paid off

petitioner's debts to the original lenders pursuant to, we

presume, the terms of the Indian Loan Guaranty and Insurance

Fund.   See Indian Financing Act of 1974, Pub. L. 93-262, sec.
                               - 9 -


201, 88 Stat. 79, current version at 25 U.S.C. sec. 1481 (1994).

This payment satisfied the remaining original loan amount, paying

it in full.

     Upon payment of petitioner's obligations, however, the BIA

assumed the rights of the debtors insured under the fund,

including the right to cancel as uncollectible any portion of

petitioner's obligations.   See 25 U.S.C. sec. 1491 (1994).

Petitioner therefore received his discharge of indebtedness

income from the Bureau of Indian Affairs, Department of the

Interior, an instrumentality of the United States.   See An Act to

provide for the appointment of a commissioner of Indian affairs,

and for other purposes, July 9, 1832, ch. 174, 4 Stat. 564

(1846), R.S. sec. 462, current version at 25 U.S.C. sec. 1

(1994).

     Borrowed funds are not included in a taxpayer's income.    Nor

are repayments of a loan deductible from income.   When, however,

one's obligation to repay the funds is settled for less than the

amount of the loan, one ordinarily realizes income from discharge
                                - 10 -


of indebtedness.3    Sec. 61(a)(12); Vukasovich, Inc. v.

Commissioner, 

, 1413-1414 (9th Cir. 1986), affg. in

part and revg. in part T.C. Memo. 1984-611.

     Income from the discharge of indebtedness results from the

release of a taxpayer from an obligation to repay a debt that

causes "a net increase in assets equal to the forgiven portion of

the debt".     United States v. Centennial Sav. Bank FSB, 

, 582 (1991); Commissioner v. Tufts, 

, 310 n.11

(1983) (the doctrine relies on a freeing-of-assets theory to

attribute ordinary income to the debtor upon cancellation);

United States v. Kirby Lumber Co., 

, 3 (1931);4 Cozzi

v. Commissioner, 

, 445 (1987) (an accession to income

due to a freeing of assets).

         Petitioner's discharge of indebtedness income is the result

of the freeing of his assets from obligations by the BIA in




     3
      Depending upon the solvency of the taxpayer and the source
or use of the funds borrowed, an amount of income from discharge
of indebtedness may be deferred or excluded from income under
sec. 108. Petitioner has not raised exclusion under sec. 108,
and the record does not support one.
     4
      In an earlier case, Bowers v. Kerbaugh-Empire Co., 

, 175 (1926), forgiveness of indebtedness was described as a
transaction that "did not result in gain from capital and labor,
or from either of them, or in profit gained through the sale or
conversion of capital." See discussion in Vukasovich, Inc. v.
Commissioner, 

, 1414-1415 (9th Cir. 1986), affg. in
part and revg. in part T.C. Memo. 1984-611.
                              - 11 -


1993,5 not from any activity by him "directly related" to

harvesting, processing, transporting, or selling fish in the

exercise of recognized fishing rights of an Indian tribe.     We

note that even had petitioner's loan proceeds been income in the

first instance in 1984, their source was not activity directly

related to harvesting, processing, transporting, or selling fish

in the exercise of recognized fishing rights of an Indian tribe.

Forgiveness of the repayment of those loan proceeds by a third

party cannot convert the freeing of petitioner's assets into

fishing-rights-related income merely because the loan proceeds

were used to purchase equipment used in such an activity.

     The BIA does not engage in harvesting, processing,

transporting, or selling fish and is not a "qualified Indian

entity" under section 7873(b)(3).   Petitioner's income was

generated in the year 1993 by the BIA's discharge of his

indebtedness.   Petitioner therefore did not receive directly, or

through a qualified Indian entity, income from a fishing-rights-

related activity.




     5
      The parties stipulated that petitioner was engaged in
fishing-rights-related activity in the years 1986 through 1991.
                             - 12 -


     We find to be correct respondent's determination that

petitioner's discharge of indebtedness income is includable in

income in 1993.

                                             Decision will be

                                        entered for respondent.