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transferred to petitioner and by the $500,000 face amount of the
promissory note that nominally was associated with petitioner's
receipt of the stock.
This $570,000 is the additional amount that petitioner is
required to report as taxable income for 1988 with regard to his
receipt of ownership of the stock of 2618 Inc.
Alleged Discharge of Indebtedness Income -- 1988
Generally, the difference between the face value of a debt and
the amount paid in satisfaction of a debt is treated as taxable
income to the debtor from discharge of the indebtedness. Sec.
61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931);
Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), affg. T.C.
Memo. 1992-673. The inclusion in a taxpayer's income of an amount
associated with discharge of a debt is based on the increase in the
debtor’s assets and net worth as a result of the discharge of the
debt. Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70
F.2d 95, 96 (5th Cir. 1934), revg. 27 B.T.A. 651 (1933).
Respondent argues that petitioner did not in good faith contest
the nature and amount of his liability as guarantor of Payne &
Potter's $705,000 promissory note and that petitioner realized
discharge of indebtedness income of $349,500 when that liability was
settled.
Petitioner argues that his liability under the guaranty
constituted a mere contingent liability, that he contested in good
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