Garry D. Acuncius and Danalene L. Acuncius - Page 8

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               Petitioners relied upon their oral testimony as evidence of            
          the FMV of assets owned and liabilities owed in 1997 immediately            
          prior to the discharge.  Having observed petitioners’ appearances           
          and demeanors at trial, we find their testimony to be honest,               
          forthright, and credible.  Based upon this testimony, we find               
          that petitioners owned approximately $8,500 in assets and owed              
          $84,116 in liabilities.  See Diaz v. Commissioner, 58 T.C. 560,             
          565 (1972) (basing analysis upon evaluation of the entire record            
          and credibility of witnesses).  Based on the entire record, we              
          find that petitioners’ liabilities exceeded the FMV of their                
          assets when their loan was discharged to such an extent that no             
          discharge of indebtedness income is recognized.                             
          II. Accuracy-Related Tax Penalty                                            
               Respondent determined that petitioners are liable for the              
          accuracy-related penalty under section 6662(a) due to a                     
          substantial understatement of tax.  Section 6662(a) imposes a               
          penalty in the amount of 20 percent on the portion of the                   
          underpayment to which the section applies.  Relevant to this                
          case, the penalty applies to any portion of the underpayment that           
          is attributable to any substantial understatement of tax under              
          section 6662(b)(2).  As outlined in the above discussion, we hold           
          that petitioners did not have $32,000 of income from discharge of           
          indebtedness.  Accordingly, we find that no understatement of tax           

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