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Elite is shown as a liability; and (2) petitioner's half-interest
in petitioners' residence is listed as an asset, while the full
amount of the residential mortgage is shown as a liability.
Respondent's counsel contended that an accurate financial statement
would show that petitioner was in fact solvent in April 1990
because Elite owned valuable equipment, patents, and real
property.5
Respondent's counsel was uncertain whether section 108(e)(5)
applied because it was not clear from whom petitioner acquired his
Elite stock. Petitioners never provided respondent's counsel with
Elite's stock record book. Respondent's counsel believed that
section 108(e)(5) would apply only if Elite had sold the stock to
petitioner. In addition, section 108(e)(5) requires petitioner to
have been solvent in April 1990.
Finally, respondent's counsel believed that petitioner
acquired all of the Elite stock through a series of agreements in
which valuable property and rights to property were transferred to
Mr. Hargis and entities that he controlled in exchange for his
Elite stock. Petitioners' claim that the Elite stock was worthless
was belied by the hard-bargained series of deals.
On February 16, 1995, counsel for petitioners and respondent
met to discuss the case. Petitioners' counsel for the first time
provided respondent's counsel with factual background to the
5 An Oct. 3, 1989, letter states that Elite was worth
approximately $1,250,000.
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