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sold real estate acquired on January 1, 1982, and realized a
$16,690 gain on the sale. They reported that their selling price
was $853,086 and that their basis was $836,396.
Respondent determined that the North Main property was worth
$250,000 when BEC canceled Mr. Burke's debt, the Walnut property
was worth $262,000 at that time, and BEC paid petitioners
$925,000 for the properties. Respondent determined that the
effect of petitioners' transfer of the properties to BEC was that
petitioners received a $413,000 dividend from BEC, and realized a
capital gain of $430,724. Respondent determined that $189,574 of
the capital gain was attributable to the Walnut property and
$241,150 to the North Main property. Applying the long-term
capital gains deduction under section 1202 to part of the
$430,724 capital gain, respondent calculated petitioners' taxable
gain at $348,283, rather than the $16,690 amount that they had
reported on their 1982 tax return.
OPINION
We must determine whether petitioners failed to report
income on BEC's cancellation of Mr. Burke's debt. Petitioners
argue that they did not, relying on the interpretation of
discharge of indebtedness income set forth in Bowers v.
Kerbaugh-Empire Co., 271 U.S. 170 (1926). Petitioners allege
that they, on behalf of BEC, purchased the Bank Stock, and that
State banking regulators later forced BEC to transfer the stock
to Mr. Burke. Petitioners allege that BEC recorded a receivable
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