Timothy J. and Joan M. Miller - Page 47

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          income for petitioner, because the discharge effects a freeing of           
          assets previously offset by the liability arising from that loan,           
          then it necessarily follows that petitioner's liability on the              
          Miller/Huntington debt was not contingent and is to be treated as           
          in existence immediately before the discharge.32                            
               We therefore agree with petitioners that the $1,375,000                
          balance on the Miller/Huntington Loan as of December 29, 1994,              
          should be counted as a liability in determining whether petitioner          
          was insolvent when the discharge occurred, which results in                 
          insolvency on that date to the extent of $1,102,000.                        
          As the amount of petitioner's insolvency exceeds $900,000, the              
          entire amount of the discharge of indebtedness income is excluded           


               32 We recognize that the foregoing analysis applies                    
          principally to the $900,000 portion of the Miller/Huntington Loan           
          that respondent contends was discharged for purposes of sec.                
          61(a)(12) in 1994.  However, petitioner's liability under the               
          remaining $475,000 portion of the Miller/Huntington Loan, which             
          was purchased by the Rapp Group on Dec. 29, 1994, satisfies the             
          standard set forth in Merkel v. Commissioner, 109 T.C. 463, 484             
          (1997), for recognizing a liability for purposes of the                     
          insolvency exception, because it was more probable than not,                
          immediately before the discharge, that petitioner would be called           
          upon to pay that obligation in the stated amount.                           
               We reach this conclusion based on the following: (i) The               
          Rapp Group purchased $475,000 of the Miller/Huntington Loan                 
          (thereby becoming petitioner's creditors rather than guarantors)            
          because it was anticipated that the completion of MMS's                     
          outstanding contracts, plus the liquidation of its assets, would            
          result in proceeds of approximately this amount; (ii) petitioner            
          formed a new entity with the Rapp Group, to which MMS's assets              
          and outstanding contracts were transferred, for the purpose of              
          completing MMS's contracts; and (iii) the $475,000 portion of the           
          indebtedness was in fact subsequently satisfied with such                   
          contract proceeds and asset liquidation.                                    





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