-9-
applicable Forms 870-AD petitioners and respondent executed address
only years 1982, 1983, and 1984 and treat only a portion of the
account increases as dividends. The forms have no application to
other years.
Issue 2. Discharge of Indebtedness Income
Each of the parties is taking a position contrary to that
taken in connection with the 1982-84 examination. Respondent
maintains that the character of the items written off was that of
loans and as such, the writeoff gave rise to discharge of
indebtedness income under section 61(a)(12). Petitioners now
maintain that the items written off should be characterized as
dividends. Respondent further contends that petitioners are
estopped by the duty of consistency from denying that the character
of the corporate advances was that of loans. We agree with
respondent.
Section 61(a)(12) defines income to include amounts realized
from the discharge of indebtedness. The discharge of a debt below
face value accords the debtor an economic benefit functionally
equivalent to income. Babin v. Commissioner, 23 F.3d 1032, 1034
(6th Cir. 1994), affg. T.C. Memo. 1992-673.
The shareholder accounts at issue were carried on Delivery's
books as shareholder loans, some dating back to 1976, until they
were written off in 1990. Further, Delivery's stockholders (that
is, petitioners) adopted a resolution ratifying all existing loans,
advances, and investments, and authorized the corporation to
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