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Therefore, on the first step of the bifurcation analysis,
petitioners realized a capital loss of $120,5443 on the transfer
of the Dime Circle property. On the second step of the analysis,
petitioners realized $210,9434 of ordinary income from discharge
of indebtedness.
Under certain circumstances, a taxpayer may exclude from
gross income the income from discharge of indebtedness if the
discharge occurs when the taxpayer is insolvent. Sec.
108(a)(1)(B). However, the exclusion cannot exceed the amount by
which the taxpayer is insolvent. For purposes of this section,
"insolvent" is defined as "the excess of liabilities over the
fair market value of assets." Sec. 108(d)(3).
Petitioners' insolvency exceeded the income they realized
from discharge of indebtedness. Accordingly, the income
petitioners realized from discharge of indebtedness in the
instant transaction is excluded from their gross income pursuant
to section 108(a)(1)(B).
2(...continued)
After Commissioner v. Tufts", 38 Tax Law. 575 (1985).
3 This represents the difference between the fair market
value of the property, $375,000, and petitioners' adjusted basis
in the property, $495,544.
4 This represents the difference between the fair market
value of the property, $375,000, and the outstanding balance of
the debt, $585,943. Petitioner testified that the lender did not
attempt to collect the difference between the outstanding balance
of the debt and the bid-in amount.
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