- 5 -
accrued interest indebtedness to the bank.4 The partnership
treated the COD income as an item of partnership income and
allocated the COD income separately to all of the partners,
including James, pursuant to the "special allocation" provisions
of the partnership agreement. On the 1992 Form K-1 that the
partnership issued to James, the partnership reported that it
allocated $6,166,647 of COD income to James.
On petitioners' 1992 joint Federal income tax return,
petitioners excluded $5,750,737 of the $6,166,647 of COD income
from their joint gross income due to insolvency pursuant to
section 108(a)(1)(B) (the insolvency exception) and reported
$415,910 of the $6,166,647 of COD income. Petitioners did not
reduce a $487,730 NOL carryover from 1992 to 1993 (Susan's NOL)
by the $5,750,737 of excluded COD income.5
4 The partnership reported the $14,094,231 of COD income on
its 1992 tax return because that is when the period of
limitations for collecting on the note expired. Additionally, in
1992, the period of limitations for collecting on the guaranty
also expired.
5 Petitioners, in an attachment to their 1992 Form 1040,
explained the generation of Susan's NOL as follows:
Total James Susan
NOL generated in 1983 $67,432 $33,716 $33,716
NOL generated in 1984 1,063,747 531,873 531,874
NOL generated in 1985 590,075 295,037 295,038
NOL generated in 1986 352,211 176,105 176,106
NOL generated in 1987 340,178 170,089 170,089
NOL utilized in 1988 (866,246) (433,123) (433,123)
NOL generated in 1989 233,969 116,984 116,985
NOL generated in 1990 454,053 227,026 227,027
(continued...)
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Last modified: May 25, 2011