Richard D. Frazier and Yvonne Frazier - Page 11

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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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