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On July 14, 2000, PhyMatrix filed a bankruptcy plan of
reorganization, which became effective on September 21, 2000.
The plan provided for the conversion of PhyMatrix stock to shares
of the newly reorganized entity. However, the plan required that
any PhyMatrix shares be tendered for conversion by March 20,
2001. The collateral was not timely tendered for conversion.4
Respondent determined that petitioner’s default on the
promissory note resulted in cancellation of indebtedness income
in the amount of $750,000 and that petitioner should be subject
to an accuracy-related penalty of $55,590.20.
Discussion
Section 61(a)(12) provides that gross income includes income
from discharge of indebtedness, which generally equals the amount
due on the obligation less the amount of any consideration paid
for the discharge. Babin v. Commissioner, 23 F.3d 1032, 1034
(6th Cir. 1994), affg. T.C. Memo. 1992-673. Section 61(a)(3)
provides that gross income includes gains derived from dealings
in property. Section 1001(a) provides that gain from the sale or
other disposition of property is the excess of the amount
realized over the property’s adjusted basis and that loss from
the sale or other disposition of property is the excess of the
4We note that sec. 4 of the Stock Pledge Agreement appears
to require petitioner to tender the collateral for conversion,
pledge shares of the newly reorganized entity as security on the
loan, and deliver such pledged shares to CareMatrix.
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