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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
$460,898.
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