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OPINION
I. Introduction
A. Issue
The issue in these consolidated cases is whether petitioners
were insolvent on August 31, 1991 (the measurement date), for
purposes of section 108(a)(1)(B) (the insolvency issue). There
is no question that, if section 108(a)(1)(B) (the insolvency
exclusion) does not apply to petitioners, $359,721 would be
included in the gross income of each of the Merkels and the
Hepburns for 1991 as each couple's distributive share of certain
discharge of indebtedness income realized by a partnership in
which both couples were partners. The parties have stipulated
that resolution of the insolvency issue depends on whether
petitioners may include in the insolvency calculation provided in
section 108(d)(3) (the statutory insolvency calculation) either
of the following obligations: (1) “the liability of each of the
petitioners as guarantors of the loan made by Security Pacific
Bank to SLC” (petitioners' guarantees) and (2) “the personal
liability, if any, of petitioners Dudley Merkel and David Hepburn
as officers of SLC for unpaid sales and use taxes assessed by the
State of North Carolina against SLC” (the assessment against SLC
shall be referred to as the State tax assessment and the personal
liability, if any, of petitioners with respect to the State tax
assessment shall be referred to as the State tax exposure). In
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