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Bank loan, effectively reversing their $430,000 reduction in
their tax basis in the Ranch. Respondent also determined an
addition to tax under section 6651(a)(1) for petitioners' failure
to timely file their 1989 joint Federal income tax return.
OPINION
Discharge of Indebtedness Income
Taxpayers generally are required to include cancellation or
discharge of indebtedness income in income. Sec. 61(a)(12). The
discharge, however, of a liability that is indefinite or
contingent will not trigger discharge of indebtedness income.
Colonial Sav. Association v. Commissioner, 85 T.C. 855, 862
(1985), affd. 854 F.2d 1001 (7th Cir. 1988). Also, where the
nature and amount of a liability are contested in a good faith
dispute and where a compromise settlement is reached, the excess
of the stated principal amount of the alleged debt over the
amount for which the liability is settled will not be treated as
discharge of indebtedness income. United States v. Hall, 307
F.2d 238 (10th Cir. 1962); N. Sobel, Inc. v. Commissioner, 40
B.T.A. 1263, 1265 (1939); 2 Mertens, Law of Federal Income
Taxation, sec. 11.19 (1996).
Petitioners argue that the economic realities of the
transaction before us reflect that the $1 million stated purchase
price for the Ranch was inflated, that it did not accurately
reflect the fair market value of the Ranch, and effectively that
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