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outstanding debts were extinguished. During 2001, four of the
notes were partially discharged by the following lenders:
Initial Note Amount of Debt
Creditor Amount Canceled
Household $111,200 $62,707
Finance
Countrywide 127,200 74,670
Home Loans
Superior 111,200 103,171
Federal
Bank
Washington 111,200 75,615
Mutual
The Household Finance debt was canceled on April 27, 2001, and
the Superior Federal Bank debt was canceled on March 1, 2001.
The remaining debts listed were canceled in 2001. Petitioners
did not include the amounts of debts canceled as income in their
2001 joint Federal income tax return. Petitioners reported a
total income in 2001 of $78,416, comprising mostly wages.
On December 29, 2003, respondent issued petitioners a notice
of deficiency for the taxable year 2001. Respondent determined
that the amounts of canceled debt from Countrywide Home Loans,
Superior Federal Bank, and Washington Mutual should have been
included in petitioners’ gross income. Respondent did not
include the canceled debt of $62,707 from Household Finance in
the notice of deficiency but raised it at trial through the
stipulation of related exhibits without explaining that it was a
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