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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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