Dudley B. and La Donna K. Merkel - Page 1

                                   109 T.C. No. 22                                    


                               UNITED STATES TAX COURT                                


                  DUDLEY B. AND LA DONNA K. MERKEL, Petitioners v.                    
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      
                    DAVID A. AND NANCY J. HEPBURN, Petitioners v.                     
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      


               Docket Nos. 10031-95, 10032-95.     Filed December 30, 1997.           


                    Ps realized income on account of the discharge of                 
               indebtedness.  Ps excluded that income pursuant to the                 
               insolvency exclusion of sec. 108(a)(1)(B), I.R.C., by                  
               including certain “contingent” liabilities in the                      
               insolvency calculation of sec. 108(d)(3), I.R.C.                       
                    Held:  The term “liabilities” in sec. 108(d)(3),                  
               I.R.C., requires Ps to prove with respect to any                       
               obligation claimed to be a liability that Ps will be                   
               called upon to pay that obligation in the amount                       
               claimed.  Held, further, Ps failed to prove that they                  
               would be called upon to pay any amount with respect to                 
               either of the obligations claimed to be liabilities.                   
               Held, further, Ps failed to prove that, on the                         
               measurement date, their liabilities exceeded the fair                  
               market value of their assets and, therefore, may not                   
               exclude any income under sec. 108(a)(1)(B), I.R.C.                     






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