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108(a)(1)(B) is limited to the amount by which the taxpayer is
insolvent. Sec. 108(a)(3). A taxpayer is insolvent for these
purposes when his liabilities exceed the fair market value of his
assets, as determined immediately before the discharge. Sec.
108(d)(3).
A financial statement of petitioner, prepared as of December
29, 1994, listed total assets of $583,00031 and total liabilities
of $310,000, resulting in a net worth of $273,000. However, the
Miller/Huntington Loan was not included in the foregoing
liabilities; instead, it was listed as a "contingent liability" of
$1,500,000. That amount was apparently an estimate, as the
parties have stipulated that the outstanding balance on the
indebtedness to Huntington was $1,375,000 as of December 29, 1994.
Petitioners argue that the characterization of the
Miller/Huntington Loan as a contingent liability on the financial
statement was an error, and that it should have been counted as a
liability for purposes of determining petitioner's solvency as of
December 29, 1994. If the $1,375,000 outstanding balance of the
Miller/Huntington Loan were so treated, petitioner's net worth as
31 The Dec. 29, 1994, financial statement does not attribute
any value to petitioner's MMS stock as of that date. In our
view, that characterization is accurate, as an MMS notice to its
creditors, dated Jan. 17, 1995, disclosed that MMS’s secured debt
exceeded the value of its assets, and its unsecured debts
exceeded $1,800,000. Accordingly, we are persuaded that the MMS
stock was worthless as of Dec. 29, 1994.
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