Michael A. Conviser and Barbara L. Conviser - Page 3

               2.   Discharge of Indebtedness Income                                  
               Dove Canyon made a profit from its activities in its first             
          years.  Later, a downturn in the California real estate market,             
          inflation, and increased interest costs resulted in significant             
          losses on the project.  In 1992 and 1993, banks forgave a                   
          substantial amount of debt owed by Dove Canyon.  Thus, Dove                 
          Canyon realized $20,345,080 in discharge of indebtedness income             
          in 1992 and $11,887,728 in 1993.  Cost overruns and a decline in            
          real estate values caused Dove Canyon's debts to exceed the value           
          of its assets.  The income from discharge of indebtedness was               
          included in Dove Canyon's taxable income since, in the case of              
          partnerships, the insolvency exception applies at the partner               
          level.  See sec. 108(a)(1)(B), (d)(6).                                      
               Mikama's allocable share of discharge of indebtedness income           
          from Dove Canyon was $2,034,508 for 1992 and $1,188,773 for 1993.           
          In 1992, Mikama excluded $2,034,508 from gross income under                 
          section 108(a)(1)(B).  In 1993, Mikama excluded $952,600 from               
          gross income because section 108(a)(3) limits the section                   
          108(a)(1)(B) exclusion to the amount by which the taxpayer is               
               Mikama's assets in 1992 and 1993 were its partnership                  
          interest in Dove Canyon and a small amount of cash.  Mikama had             
          cash before the discharge of indebtedness of $1,900 in 1992 and             
          $1,100 in 1993.                                                             

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