- 8 - 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 taxPage: Previous 1 2 3 4 5 6 7 8 9 Next
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