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The revenue agent requested petitioners to produce pertinent
information regarding the stock transfer and cancellation of
indebtedness, as well as the circumstances surrounding these
events. Petitioners failed to do so.
The revenue agent did not possess sufficient facts to
understand the 1987 and 1990 transactions that transferred stock
ownership of Elite from Mr. Hargis to petitioner. The documentary
evidence that the agent possessed indicated that after the two
April 1990 transactions, petitioner was the owner of all the
outstanding Elite stock and no longer was indebted to Elite.
Because the parties were unable to reach an agreement with
respect to the discharge of indebtedness income, respondent issued
a notice of deficiency on March 11, 1994. Respondent determined a
$70,355 deficiency in petitioners' 1990 Federal income tax and a
$14,071 accuracy-related penalty pursuant to section 6662(a).
3(...continued)
Sec. 108(a)(1)(B). The amount of discharge of indebtedness
income excluded from gross income may not exceed the amount of
the taxpayer's insolvency. Sec. 108(a)(3). A taxpayer is
insolvent when his liabilities exceed the fair market value of
his assets immediately before the discharge. Sec. 108(d)(3). If
an insolvent taxpayer's debt is discharged, no income is realized
because the discharge of indebtedness does not make assets
available to the debtor. Quinn v. Commissioner, 31 B.T.A. 142,
145 (1934); cf. United States v. Kirby Lumber Co., 284 U.S. 1
(1931). However, a debtor who is insolvent before the discharge
realizes income to the extent such discharge renders him solvent.
Conestoga Transp. Co. v. Commissioner, 17 T.C. 506, 513 (1951);
Texas Gas Distrib. Co. v. Commissioner, 3 T.C. 57, 61-62 (1944).
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