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“determination of the income tax and penalty set forth in the
notice of deficiency is based upon an erroneous determination
that the debt was forgiven by * * * [CareMatrix] during 2000.”3
Respondent’s answer to the petition responded as follows:
“Denies; alleges that the respondent determined a deficiency and
a penalty in income tax.” We understand respondent’s position in
the answer to be that petitioner realized discharge of
indebtedness income from forgiveness of indebtedness of $750,000
in 2000 and that petitioner is liable for an income tax
deficiency of $277,951 and a section 6662 accuracy-related
penalty of $55,590.20.4
We now turn to our analysis of whether respondent has proved
that respondent’s legal position was substantially justified. We
base our analysis on the facts and legal precedents which formed
the basis of that position. See Maggie Mgmt. Co. v.
Commissioner, supra at 443. Relying on Cozzi v. Commissioner, 88
T.C. 435, 445 (1987), respondent contends in the instant motion
that a debt is viewed as having been discharged the moment that
it becomes clear that the debt will never have to be paid and
3The notice of deficiency’s explanation of adjustments in
relevant part states: “It is determined that $750,000.00 from
the discharge of indebtedness (commonly referred to as COD
income) by CareMatrix is includible in income. Accordingly,
taxable income is increased $750,000.00 for the tax year ended
December 31, 2000.”
4We note that the parties do not dispute that the loan from
CareMatrix constitutes bona fide indebtedness.
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