Dudley B. and La Donna K. Merkel - Page 3

          realized income on account of the discharge of indebtedness.  On            
          their 1991 U.S. Individual Income Tax Returns (Forms 1040; filing           
          status of married filing joint return), the Merkels and the                 
          Hepburns each (couple) disclosed their distributive share of that           
          income, $359,721, but excluded such amount from gross income on             
          the ground that each was insolvent immediately before that income           
          was realized by the partnership.                                            
          The SLC Indebtedness                                                        
               Systems Leasing Corp. (SLC) is an Arizona corporation                  
          organized in 1979 by petitioners Dudley Merkel and David Hepburn            
          to engage in the computer leasing business.  SLC is owned “50/50”           
          by Dudley Merkel and David Hepburn.  Dudley Merkel and David                
          Hepburn were officers of SLC during its fiscal years ended                  
          February 29, 1992, and February 28, 1993, and received officer              
          compensation for those years as follows:                                    
                                   FYE 2/29/92         FYE 2/28/93                    
               Dudley Merkel       $183,202            $191,150                       
               David Hepburn       182,824             191,151                        
               In 1986, SLC incurred an indebtedness to Security Pacific              
          Bank (the indebtedness and the bank, respectively), evidenced by            
          a note (the SLC note).  The SLC note was personally guaranteed by           
          each petitioner (collectively, petitioners’ guarantees).  As of             
          April 16, 1991, the unpaid balance of the SLC note was in excess            
          of $3,100,000, and SLC was in default of its obligations under              
          the SLC note.                                                               

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