Gilbert Hahn, Jr. and Margot H. Hahn - Page 4

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               Petitioner disputed the FDIC’s claim, and, during October              
          1995, petitioner and the FDIC entered into a settlement agreement           
          in which petitioner agreed to pay an additional $975,000 in                 
          exchange for a release of the FDIC’s claims against him.  The               
          settlement agreement states in part that petitioner “denies the             
          entire claim” and that petitioner and the FDIC were settling the            
          dispute to “avoid the time and cost of litigation”.                         
               During November 1995, petitioner paid the FDIC the $975,000            
          specified in the settlement agreement.  The FDIC then issued                
          petitioner a Form 1099-C, Cancellation of Debt, indicating that             
          petitioner had received $1,512,193 of income from discharge of              
          indebtedness.  Petitioner contacted the FDIC to dispute the                 
          issuance of the Form 1099-C, but the FDIC refused to rescind or             
          amend the information return.                                               
               On their joint 1995 Federal income tax return, petitioners             
          did not report the $1,512,193 as income.  Additionally,                     
          petitioners claimed a $999,090 deduction on Schedule C, Profit or           
          Loss From Business, for horse breeding and training activity.               
          The $999,090 represents the $975,000 payment to the FDIC and                
          $24,090 of legal fees reportedly paid in connection with the                
          settlement.  Taking into account the deduction claimed on                   
          Schedule C, petitioners reported adjusted gross income of                   

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