-4- false; at the time petitioner acquired the stock, Elite had a negative net worth and its plant was in poor physical condition. On April 2, 1990, H. Enterprises, Mr. Hargis, Elite, and petitioner entered into an agreement pursuant to which, among other matters, petitioner purchased an additional 2 percent of Elite stock from H. Enterprises. As part of the agreement, Elite forgave all debts owed it by H. Enterprises, Mr. Hargis, and petitioner, including petitioner's $228,000 note to Elite. Subsequently, on April 19, 1990, Elite redeemed all of its stock owned by H. Enterprises. As a result of this redemption, petitioner owned 100 percent of Elite stock. Furthermore, on April 19, 1990: (1) H. Enterprises and Mr. Hargis sold to Elite their interest in patents, trademarks, servicemarks, logos, trade names, formulas, and paint formulations; and (2) Mr. Hargis entered into a noncompetition agreement with Elite. Administrative Proceeding The examination of petitioners' 1990 Federal income tax return began as an offshoot of an audit of H. Enterprises and Elite. The revenue agent questioned whether petitioners should have reported the cancellation of the $228,000 debt as income on their 1990 return.1 1 Gross income includes income from the discharge of indebtedness. Sec. 61(a)(12). A taxpayer may realize discharge of indebtedness income by paying an obligation at less than its (continued...)Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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