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Associates (Riverbank)8 on June 16, 1988. Riverbank agreed to
purchase the apartment mortgages for $12,100,000, which the
parties agree was $650,000 in excess of their fair market value.
Approximately 7 months after the closing of the Agreement,
Commercial sent Parker Properties and Twenty Mile each a form
entitled, "Acquisition or Abandonment of Secured Property" (Form
1099-A), reflecting income from the cancellation of indebtedness
in the amounts of $3,419,963 and $1,395,492, respectively.
Parker Properties and Twenty Mile each reported these amounts as
other income. However, the joint ventures then reported an
offsetting "other deduction" on their respective tax returns with
the following disclosure: "The partnership received a 1099 * * *
described as income from forgiveness of indebtedness. This was
not reported as income since it resulted from a contribution to
capital rather than from debt relief." Commercial, however,
claimed the above-mentioned amounts as an ordinary loss from the
cancellation of indebtedness. As a result, Commercial entered
into an agreement with the investors which provided that the
investors would hold Commercial harmless from any claims that may
arise from its issuing the Forms 1099-A.
8 Riverbank was at all relevant times a Colorado general
partnership of which Riverbank Denver, Inc., and Residual
Acquisition Corp. were general partners. Residual Acquisition
Corp. was 100 percent owned by David A. Gitlitz.
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