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Petitioners do not allege, and there is no evidence to
suggest, that the FDIC contacted them regarding the loan after
November 7, 1994.
Respondent issued a “30-day letter” to petitioners for
taxable years 1994 and 1996. In that letter, respondent proposed
certain adjustments based on his conclusion that petitioners had
realized income from the discharge of indebtedness in 1994 equal
to the principal amount of the loan ($596,078).4 Specifically,
because petitioners were insolvent when the alleged discharge
occurred, respondent proposed to reduce to zero petitioners’
unused 1994 NOL deduction (the unused 1994 NOL deduction) of
$137,033 pursuant to section 108(b)(2)(A). Since petitioners’
1996 NOL deduction derived entirely from the unused 1994 NOL
deduction, the proposed elimination of the unused 1994 NOL
deduction had the effect of reducing petitioners’ 1996 NOL
deduction to zero. That elimination of petitioners’ 1996 NOL
deduction had the effect of increasing petitioners’ 1996 tax by
$36,042 (after an adjustment for a reduction in itemized
deductions pursuant to section 68). Respondent also proposed to
impose an accuracy-related penalty for 1996 of $7,208.40.
4 In general, a cash basis debtor does not realize
discharge of indebtedness income upon the cancellation of an
accrued but unpaid obligation to pay deductible interest. See
sec. 108(e)(2).
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