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unpaid interest, $3,672 in escrow fees, and $3,561 in liquidation
expenses. The parties have stipulated that, in March 1994, 4
months before the foreclosure sale, the property had a fair
market value of $105,000, and that, after the sale, PNC dis-
charged the balance due in the amount of $66,763. Petitioner was
not insolvent when the discharge occurred.
PNC issued petitioner a Form 1099-C (Cancellation of Debt),
reflecting that he had received $66,763 in discharge of indebted-
ness income during 1994. Petitioner did not report any of this
amount on his 1994 Federal income tax return. In the notice of
deficiency, respondent increased petitioner's income by $66,763.
Respondent now concedes that petitioner need report only the
amount by which the outstanding balance of the loan exceeds the
fair market value of the property. Respondent concedes further
that, under section 108(e)(2), petitioner is entitled to exclude
the accrued interest of $23,489 from the discharged indebtedness,
because payment of that liability would have given rise to a
deduction. Thus, according to respondent, the difference of
$55,014 (outstanding loan balance of $160,014, less the proper-
ty's fair market value of $105,000, as stipulated) represents
petitioner's discharge of indebtedness, of which only $31,525 is
taxable because of the accrued interest exclusion.
Petitioner admits to realizing discharge of indebtedness
income. He argues, however, that the full amount should be
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