Dudley B. and La Donna K. Merkel - Page 6

          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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