Roderick E. Carlson and Jeanette S. Carlson - Page 1

                                   116 T.C. No. 9                                     

                               UNITED STATES TAX COURT                                

             RODERICK E. CARLSON AND JEANETTE S. CARLSON, Petitioners v.              
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 12068-99.                Filed February 23, 2001.           

                    Ps, husband and wife, purchased a fishing vessel                  
               (vessel).  They financed that purchase by borrowing                    
               money from a bank.  As security for the loan, Ps grant-                
               ed the bank a mortgage interest in the vessel.  Ps                     
               became delinquent in making payments to the bank on the                
               loan, and the bank foreclosed on the vessel, sold it as                
               part of that foreclosure, used the proceeds from that                  
               sale to reduce the outstanding principal balance of the                
               loan, and discharged the remaining balance of the loan.                
               As a result, Ps realized capital gain of $28,621 and                   
               discharge of indebtedness (DOI) income of $42,142.                     
                    Ps excluded the DOI income from their gross income                
               pursuant to the insolvency exception of sec.                           
               108(a)(1)(B), I.R.C., because they determined that they                
               were insolvent within the meaning of sec. 108(d)(3),                   
               I.R.C.  In making the insolvency calculation prescribed                
               by sec. 108(d)(3), I.R.C., Ps excluded certain assets                  
               that they claim are exempt from the claims of creditors                
               under applicable State law.  The parties agree that if                 

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