-8-
Judicial Proceeding
Petitioners filed a petition in this Court on June 14, 1994.4
Their petition reiterated the arguments enunciated during the
administrative proceeding.
On June 22, 1994, an attorney in respondent's Richmond,
Virginia, office was assigned this case. Respondent's answer,
filed on July 22, 1994, denied petitioners' allegations for lack of
sufficient information.
On February 1, 1995, respondent's counsel sent a letter to
petitioners' counsel summarizing respondent's position that (1)
section 108(a)(1)(B) is not applicable because petitioner was not
insolvent in April 1990, and (2) the debt forgiveness does not
qualify as a section 108(e)(5) purchase price adjustment. In the
letter, respondent's counsel asked that the parties begin
stipulating facts, and stated that the documents provided by
petitioners "present a confusing picture" with regard to
petitioner's acquisition of Elite stock.
Petitioners' claim of insolvency at the time the stock was
transferred was based on a financial statement petitioners prepared
as of April 1990. That statement reflects a negative net worth of
$229,700. However, respondent's counsel did not agree with certain
aspects of the financial statement: (1) Petitioner's Elite stock is
valued at only $100, while the full amount of his $228,000 note to
4 The petition was timely mailed on June 9, 1994. Sec.
7502(a).
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