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September 15, 1995, petitioner executed a contribution agreement
and pursuant to its terms contributed $220,000 to the
partnership’s bankruptcy estate in exchange for release of “all
claims or potential claims of creditors against * * *
[petitioner] arising out of or related to” the partnership.
On December 19, 1995, the bankruptcy court entered an order
approving the contribution agreement. In its order, the
bankruptcy court specifically discharged and released petitioner
from any and all liability to the trustee and the bank arising
out of or relating to the partnership, petitioner’s status as a
general partner in the partnership, and the April 9, 1985,
personal guaranty agreement. In addition, the bankruptcy court’s
order released petitioner from “the claims or potential claims of
all creditors” of the partnership. The bankruptcy court further
ordered that petitioner “is subject to the jurisdiction of the
Bankruptcy Court.”
Tax Reporting
For the 1995 tax year, the partnership issued petitioner a
Schedule K-1, Partner’s Share of Income, Credits, Deductions,
etc., allocating to him $195,120 of discharge of indebtedness
income. Petitioners excluded this entire amount from their gross
income as reported on their joint 1995 Federal income tax return.
Notice of Deficiency
By notice of deficiency, respondent determined that the
$195,120 of discharged debt should be included in petitioners’
1995 income.
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Last modified: May 25, 2011