Garry D. Acuncius and Danalene L. Acuncius - Page 6

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          B.   Did the Insolvency Exception Apply in 1997?                            
               Petitioners concede that BankTEXAS forgave their loan of               
          $32,000 in 1997.  The parties agree that resolution of the issue            
          as to whether petitioners must include this income in 1997                  
          depends on whether, immediately before BankTEXAS forgave their              
          loan on April 20, 1997, petitioners were insolvent within the               
          meaning of sections 108(a)(1)(B) and (d)(3) (insolvency                     
               Petitioners contend that the evidence demonstrates that                
          their liabilities exceeded the fair market value (FMV) of their             
          assets in 1997.  Additionally, petitioners argue that further               
          evidence, such as the foreclosure on their house and BankTEXAS’s            
          unsuccessful attempts to collect on the loan, support a                     
          conclusion that they were insolvent.  Respondent argues that                
          petitioners were not insolvent and that section 108(a)(1)(B) does           
          not apply.  Respondent contends that petitioners’ proof of the              
          FMV of their assets in 1997 was “incomplete and highly                      
          questionable” because it was based on petitioners’ memory.                  
               Section 61(a) defines the term “gross income” broadly to               
          mean all income from whatever source derived, including income              
          from discharge of indebtedness.  Sec. 61(a)(12).  Section 108(a)            
          provides certain exceptions to section 61(a)(12).  See Gitlitz v.           
          Commissioner, 531 U.S. 206, 213 (2001).  Section 108(a)(1)(B)               
          excludes from gross income any amount that otherwise would be               

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