Dennis and Dorinda J. Jelle - Page 6




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               minus the net recovery value of the real estate * * *.                 
               This amount is $177,772.28 and is the maximum amount                   
               that can be recaptured.                                                
               To secure the foregoing recapture agreement and in                     
          accordance with its terms, petitioners gave FmHA a mortgage on              
          the 135 acres of their farmland secured by the original FmHA                
          mortgages.  The recapture agreement provided that FmHA would                
          release this lien with respect to subject property sold or                  
          conveyed within 10 years upon payment of the recapture amount               
          due.  With respect to portions of the encumbered real estate not            
          disposed of during the agreement’s 10-year term, the lien would             
          be released at the expiration of such period.  The lien was                 
          secondary to liens held by Russell V. Jelle in the amount of                
          $31,000 and by the State Bank of Mt. Horeb in the amount of                 
          $92,057.                                                                    
               For the taxable year 1996, the U.S. Department of                      
          Agriculture Farm Service Agency issued to petitioners a Form                
          1099-C, Cancellation of Debt, showing an “Amount of debt                    
          canceled” of $177,772.27.  Petitioners did not report this amount           
          as income on their 1996 tax return and provided thereon no                  
          reference to the buyout transaction or explanation of its                   
          treatment.                                                                  
               Petitioners additionally received Social Security benefits             
          during 1996 in the amount of $3,420.  No portion of these                   
          benefits was disclosed by petitioners on their return for 1996.             






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