16
constitutes a sale or exchange. See Yarbro v. Commissioner, 737
F.2d 479, 483-484 (5th Cir. 1984), affg. T.C. Memo. 1982-675;
Gershkowitz v. Commissioner, 88 T.C. 984, 1016 (1987); Estate of
Delman v. Commissioner, 73 T.C. 15, 33 (1979). We reach this
conclusion for several reasons. First, Eltech's discharge of the
debt and Lone Star's release of ownership in the chlor-alkali
system were part of one settlement. Second, we find that as part
of the settlement, Eltech directed Lone Star to transfer
ownership of the chlor-alkali system to Electro rather than have
those rights transferred back to Eltech. Third, we find
incredible the contention that Eltech forgave over $2 million in
debt owed by Lone Star, while at the same time letting Lone Star
retain some ownership rights in the chlor-alkali system, and then
in a "separate and distinct" transaction, Lone Star transferred
its ownership rights in the chlor-alkali system to Electro. We
find that Eltech's discharge of the debt and Lone Star's transfer
of its ownership rights were part of a single transaction. Lone
Star must recognize as gain the excess of the amount of debt
forgiven over the adjusted basis of the chlor-alkali system.
Secs. 61(a)(3), 1001(a); sec. 1.1001-2(a)(1), Income Tax Regs.
Lone Star's partners must take into account their distributive
shares of such gain. Sec. 702(a). As for petitioners' argument
under section 108(e)(5), that section is not applicable to gains
derived from dealings in property. Gershkowitz v. Commissioner,
supra.
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