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guaranty generated the COD income and that Susan had no COD
income because she was not liable under the guaranty.
Petitioners' argument is contrary to the facts. On the
partnership's 1992 tax return, the partnership reported
$14,094,231 in COD income from the discharge of the partnership's
principal and accrued interest indebtedness to the bank. The
partnership treated the COD income as an item of partnership
income and allocated the COD income separately to 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 allocated $6,166,647 of COD income to
James. Thus, the facts are that the COD income was not generated
from James' release from his guaranty, but rather the COD income
was generated by the discharge of the partnership's indebtedness,
and the partnership made a special allocation of that income to
James (i.e., it passed through the partnership interest).7
Petitioners next argue that COD income is not "income" to be
divided between spouses under Texas community property law, that
6(...continued)
to in paragraph (1) shall be made in the following tax
attributes in the following order:
(A) NOL.--Any net operating loss for the taxable
year of the discharge, and any net operating loss
carryover to such taxable year.
7 Furthermore, we note that a guarantor generally does not
recognize income when he is relieved of his guaranty obligation.
See Landreth v. Commissioner, 50 T.C. 803, 812-813 (1968).
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