- 34 -
derived from the total of all claims paid by Prudential Bancorp
in the settlement agreement, rather than the ultimate sale price
to third parties.18
Generally, a transfer of property by a debtor to a creditor
in satisfaction, in whole or in part, of an indebtedness
constitutes a “sale or exchange” under section 1001, and the
excess of the fair market value over the basis of the property
applied against the indebtedness constitutes taxable gain. Gehl
v. Commissioner, 102 T.C. 784, 786 (1994), affd. without
published opinion 50 F.3d 12 (8th Cir. 1995); Allan v.
Commissioner, 86 T.C. 655, 659-660 (1986), affd. 856 F.2d 1169,
1172 (8th Cir. 1988); Freeland v. Commissioner, 74 T.C. 970
(1980). The sale price represents the fair market value of the
property at the time of sale. Sec. 1.1001-1(a), Income Tax Regs.
Petitioners, on brief, argue that they understated the cost
basis reported on their return because they calculated the
Concordia Bank loan as $1 million instead of $1,400,000.
Petitioners contend that the addition of the omitted amount
brings the cost basis to $2,186,000. Petitioners also contend
18 It is not likely that the total of all debts settled with
Prudential Bancorp approximated $1.8 million. That is so because
the minimum amount of debt on the Crestwood property, as
contended by respondent, is $1.75 million. In addition to the
debt outstanding on the Crestwood property, petitioners settled
their obligations relating to the corporate debt. It is likely
that the total or overall amount of debt settled exceeded the
eventual sale price of the Crestwood property, or $2,525,000.
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