Eugene K. Friscone and Nicole Friscone - Page 5

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               Petitioners' 1990 Federal individual income tax return                 
          included only 45 percent of the principal received on the long-             
          term note.  The gain was determined under the installment method.           
          The return failed to include, as part of the computation of gain,           
          the $23,000 cash received, the debt from which petitioner was               
          relieved in the amount of $31,200, and the remaining 55 percent             
          of the sales proceeds.  Petitioners' 1991 return similarly                  
          included only 45 percent of the principal payments on the long-             
          term note in the computation of gain under the installment                  
          method.  Petitioners' returns for 1990 and 1991 each included               
          only 45 percent of the interest income received on the long-term            
          note.                                                                       
               During 1990, petitioner paid Linda Friscone $17,798.02 from            
          the proceeds he received on the sale of the MUI stock.  During              
          1991, petitioner paid Linda Friscone $10,041.16 from the proceeds           
          he received on the sale of the MUI stock.                                   
               Section 61(a)(3) includes in gross income "all income from             
          whatever source derived, including * * * Gains derived from                 
          dealings in property".  Section 1001(a) defines the amount of               
          gain from sale or other disposition of property as "the excess of           
          the amount realized therefrom over the adjusted basis".  The                
          amount realized also includes "the amount of liabilities from               
          which the transferor is discharged as a result of the sale or               
          disposition."  Sec. 1.1001-2(a)(1), Income Tax Regs.  Section               
          1001(c) requires that "Except as otherwise provided in this                 




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