Jerry S. Payne - Page 35

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          faith the nature and amount of the liability, and that he should not        
          be required to report discharge of indebtedness income in connection        
          with settlement of this liability.                                          
               In Landreth v. Commissioner, 50 T.C. 803, 812-813 (1968), we           
          distinguished the situation involving a guarantor of a debt from that       
          of a primary obligor on a debt, and we concluded that a guarantor of        
          a debt, upon the payment of the debt by the primary obligor, does not       
          realize discharge of indebtedness income when relieved of an                
          obligation under a guaranty.  We stated as follows:                         

               The situation of a guarantor is not like that of a debtor              
               who as a result of the original loan obtains a nontaxable              
               increase in assets.  * * * Where a debtor is relieved of               
               his obligation to repay the loan, his net worth is                     
               increased over what it would have been if the original                 
               transaction had never occurred.  This real increase in                 
               wealth may be properly taxable.  However, where the                    
               guarantor is relieved of his contingent liability, either              
               because of payment by the debtor to the creditor or because            
               of a release given him by the creditor, no previously                  
               untaxed accretion in assets thereby results in an increase             
               in net worth.  * * * [Id. at 813; citations omitted.]                  

               On the evidence before us, we conclude that the discharge of the       
          balance due on Payne & Potter's $705,000 debt obligation to TexCommBk       
          may have resulted in discharge of indebtedness income to Payne &            
          Potter but not to petitioner.  When petitioner’s contested liability        
          as guarantor of the debt obligation was settled, petitioner did not         
          realize an increase in net worth, and petitioner is not to be charged       
          with discharge of indebtedness income with regard thereto.                  
          See id.; Whitmer v. Commissioner, T.C. Memo. 1996-83.                       





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