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for $350,000. Petitioners borrowed this $350,000 from First
National Bank of Alamogordo in Alamogordo, New Mexico, and paid
the $350,000 to the FDIC. As a result of the settlement between
petitioners and the FDIC, a total of $550,537 was actually paid
on the Bank loan (petitioners' $350,000 settlement payment to the
FDIC plus the $200,537 in installment payments received by Moncor
Bank equals $550,537).
Petitioners' accountant prepared petitioners' 1989 joint
Federal income tax return. With their 1989 tax return,
petitioners filed a Form 4868 requesting an automatic extension
of time to file their 1989 tax return until August 15, 1990. On
August 20, 1990, respondent received petitioners' 1989 joint
Federal income tax return and their Form 4868.
On their 1989 tax return, petitioners did not include as
discharge of indebtedness income the $449,463 unpaid portion of
the stated principal amount of the Bank loan ($1 million stated
principal amount of the Bank loan less $550,537 paid on the loan
equals $449,463). Instead, petitioners filed with their 1989 tax
return a form electing under section 108(e)(5) to reduce their
tax basis in the Ranch by $430,000.1
On audit, respondent charged petitioners with $449,463 in
discharge of indebtedness income relating to the settlement
between the FDIC and petitioners of their indebtedness on the
1 The $430,000 represents petitioners' calculation of the
basis adjustment to be made under sec. 108(e)(5).
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