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year. This return reported beginning inventory of $3,074,506,
ending inventory of $3,673,423, and purchases of $13,758,337.
On its return for tax year ended June 30, 1993, petitioner
adjusted the beginning inventory to correct the "correcting"
journal entry Mr. Rosales made by reducing by $1,860,621 beginning
inventory and paid-in capital.
Notice of Deficiency
In the notice of deficiency, respondent determined that
petitioner was liable for a $741,379 deficiency on the theory that
it was relieved of a $2,031,778 liability during the tax year ended
June 30, 1991. Respondent also determined a section 6651(a)(1)
addition to tax and a section 6662(a) accuracy-related penalty.
OPINION
Issue 1. Additional Income
Our first task is to determine whether petitioner had
additional income of $2,031,778 in its tax year ended June 30,
1991. In this regard, respondent makes three alternative
arguments.
A. Discharge of Indebtedness Income
Section 61(a)(12) provides the general rule that gross income
includes income from the cancellation of indebtedness. Generally,
the amount of income includable is the difference between the face
value of the debt and the amount paid in satisfaction of the debt.
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