- 46 -
of December 29, 1994, would be ($1,102,000); namely, $583,000 in
assets minus $1,685,000 in liabilities.
Respondent, relying on Merkel v. Commissioner, 109 T.C. 463
(1997), affd. 192 F.3d 844 (9th Cir. 1999), argues that petitioner
was solvent as of December 29, 1994, because the $1,375,000
balance of the Miller/Huntington Loan was a contingent liability
that, given the Rapp Group guaranties and the guarantor waivers,
was unlikely to be paid by petitioner. Thus, respondent contends,
the balance owed on the Miller/Huntington Loan should not be
counted in determining whether petitioner was insolvent for
purposes of section 108(a)(1)(B).
We believe respondent misreads Merkel. The contingent
liabilities at issue in Merkel were not the same indebtedness that
was being discharged, as is largely the case here. To suggest as
respondent does that the discharged debt, because it is being
discharged, does not count as a liability for purposes of
determining insolvency under section 108(a)(1)(B) contravenes the
statute's design and purpose. Section 108(d)(3) provides that the
determination of whether a taxpayer is insolvent is to be made on
the basis of the taxpayer's assets and liabilities "immediately
before the discharge." The quoted language evidences an intent to
count those liabilities for which discharge is imminent. If one
argues, as respondent does, that the discharge of the
Miller/Huntington Loan gives rise to discharge of indebtedness
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