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that the restructuring that they attempted was in form and
substance a contribution to capital to each partnership. We must
decide whether petitioners realized income from the cancellation
of indebtedness. If there was a cancellation of indebtedness
resulting in income to petitioners, we must decide the amount
recognizable. Petitioners have the burden of showing that
respondent’s determination is in error and/or that the amounts in
controversy were capital contributions. Rule 142(a).
Petitioners assert that the conversion of the loan into a
partnership capital interest is a nonrecognition event under
section 721. Section 721 provides: "No gain or loss shall be
recognized to a partnership or to any of its partners in the case
of a contribution of property to the partnership in exchange for
an interest in the partnership." We must decide if the substance
of these transactions was the same as the form in which the
partnerships attempted to cast it. Section 1.721-1, Income Tax
Regs., provides in relevant part: "In all cases, the substance
of the transaction will govern, rather than its form." See
Colonnade Condominium, Inc. v. Commissioner, 91 T.C. 793, 813
(1988).
Section 61(a)(12) provides that gross income includes
"Income from discharge of indebtedness". The parties agree that,
before the execution of the Agreement, the items in question were
debts of Parker Properties and Twenty Mile owed to Empire and,
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