Gilbert Hahn, Jr. and Margot H. Hahn - Page 5

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               Respondent issued petitioners a notice of deficiency for               
          1995 determining, inter alia, that the $1,512,193 was forgiveness           
          of indebtedness income and therefore taxable.  Respondent also              
          disallowed the claimed Schedule C deduction for $999,090 and                
          determined an accuracy-related penalty pursuant to section                  
          6662(a).  Petitioners filed a timely petition for review with the           
          Court, and respondent filed an answer.                                      
               During October 2005, respondent contacted the FDIC.  In                
          response to respondent’s inquiry, the FDIC indicated that the               
          $1,512,193 reported on the Form 1099-C reflected only the amount            
          of loan principal that was forgiven;3 as part of the settlement             
          agreement, the FDIC also had forgiven amounts owed for interest,            
          late charges, attorney’s fees, and other costs that were not                
          reflected in the Form 1099-C.  (For convenience, we refer to the            
          interest, late charges, attorney’s fees, and other costs as the             
          related items.)  Respondent filed an amendment to answer seeking            
          to increase the deficiency to include forgiveness of indebtedness           
          income attributable to the related items.                                   

               3 Respondent contends that the $1,512,193 figure was                   
          calculated as follows:  The FDIC first applied the $975,000                 
          payment toward accrued interest of $734,809.  The balance of                
          $240,191 was then applied to reduce the outstanding principal               
          from $1,752,384 to $1,512,193.  This latter figure, according to            
          respondent, represents the amount shown on the Form 1099-C,                 
          Cancellation of Debt.  The settlement agreement does not specify            
          how the $975,000 was allocated, however, and for purposes of the            
          instant motion we do not decide if respondent’s calculation is              

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