ASSETS UNDER SECTION 108(d)(3) INCLUDES ASSETS EXEMPT UNDER STATE LAW.

                       UNITED STATES TAX COURT

[1] CHIECHI, JUDGE: Respondent determined a deficiency in, and an accuracy-related penalty under section 6662(a) ¹ on, petitioners' Federal income tax (tax) for 1993 in the amounts of $14,449 and $2,890, respectively.

[2] The issues remaining for decision are:

(1) Are petitioners entitled to exclude from gross income under section 108(a)(1)(B) discharge of indebtedness (DOI) income in the amount of $42,142? We hold that they are not.

(2) Are petitioners liable for the accuracy-related penalty under section 6662(a)? We hold that they are to the extent stated herein.

BACKGROUND

[3] This case was submitted fully stipulated. The facts that have been stipulated are so found.

[4] Petitioners' mailing address was in Chignik, Alaska, at the time the petition was filed.

[5] In 1988, petitioner Roderick E. Carlson, whose occupation during the year at issue was commercial fisherman, and petitioner Jeanette S. Carlson purchased the fishing vessel Yantari (Yantari), a 44-foot seiner made of fiber glass that was built in 1982. They paid $202,451 for that fishing vessel, which included the engine. Petitioners financed their purchase of the Yantari by borrowing money (loan) from Seattle First National Bank (bank or Seattle First). As security for that loan, petitioners granted to the bank a so-called preferred marine mortgage interest (mortgage) in the Yantari.

[6] During 1992, petitioners became delinquent in making payments to the bank on the loan. On February 8, 1993, when the unpaid principal balance of the loan was $137,142, the bank foreclosed on the Yantari, the Yantari was sold for $95,000 as part of that foreclosure, the proceeds from that sale were used to reduce the outstanding principal balance of the loan by $95,000, and the bank discharged the remaining $42,142 of the loan. (For convenience, we shall refer collectively to the bank's foreclosure on the Yantari and the concomitant sale of the Yantari and other events that occurred on February 8, 1993, as the foreclosure sale.) As a result of the foreclosure sale, petitioners realized capital gain of $28,621 and DOI income of $42,142.

[7] Immediately preceding the foreclosure sale on February 8, 1993, petitioners had (1) assets located in the States of Alaska and Washington which had an aggregate fair market value of $875,251 and (2) liabilities which totaled $515,930. ² Included in petitioners' assets immediately preceding the foreclosure sale on February 8, 1993, was a so-called Alaska limited entry fishing permit which had a fair market value of $393,400. ³ Petitioners' Alaska limited entry fishing permit was a purse seine permit for the commercial fishing of salmon in the Chignik, Alaska fishery (petitioners' fishing permit).

[8] Petitioners jointly filed Form 1040, U.S. Individual Income Tax Return, for 1993 (petitioners' joint return). In petitioners' joint return, petitioners did not report any gain or loss or any DOI income as a result of the foreclosure sale of the Yantari. However, petitioners attached to that return Form 1099-A, Acquisition or Abandonment of Secured Property (Form 1099-A), which the bank issued to petitioners and which showed that, on a date that is not legible, ⁴ the outstanding principal balance of the loan secured by the Yantari was $137,142. The following was written by hand at the bottom of Form 1099-A that was attached to petitioners' joint return: "Taxpayer Was Insolvent -- No Tax Consequence" (written statement).

[9] Respondent timely issued to petitioners a notice of deficiency for 1993 (notice). In the notice, respondent determined, inter alia, to increase petitioners' income by $42,142 for "RELIEF OF DEBT" and by $28,629 for "DISPOSITION OF F/V YANTARNI [sic]". Respondent also determined in the notice to impose an accuracy- related penalty under section 6662(a).

DISCUSSION

[10] Petitioners bear the burden of proving that the determinations in the notice are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). That this case was submitted fully stipulated does not change that burden or the effect of a failure of proof. See Rule 122(b); Borchers v. Commissioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir. 1991).

DOI INCOME -- SECTION 108

[11] Section 61(a) defines the term "gross income" broadly to mean all income from whatever source derived, including income from discharge of indebtedness. See sec. 61(a)(12). Section 108(a) provides certain exceptions to section 61(a)(12). See Gitlitz v. Commissioner, 531 U.S. __, __, 69 U.S.L.W. 4060, 4062 (Jan. 9, 2001). As pertinent here, section 108(a)(1)(B) (insolvency exception) excludes from gross income any amount that otherwise would be includable in gross income by reason of the discharge in whole or in part of indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent. The amount of DOI income excluded under section 108(a)(1)(B) is not to exceed the amount by which the taxpayer is insolvent. See sec. 108(a)(3). The term "insolvent" is defined in section 108(d)(3) as follows:

          (3) Insolvent. -- For purposes of this section [108], the

[13] It is petitioners' position that the word "assets" as used in section 108(d)(3) does not include assets that are exempt from the claims of creditors under applicable State law. In support of that argument, petitioners rely principally on Cole v. Commissioner, 42 B.T.A. 1110 (1940), and Hunt v. Commissioner, T.C. Memo. 1989-335. According to petitioners, petitioners' fishing permit, which had a fair market value of $393,400 immediately preceding the foreclosure sale on February 8, 1993, is an asset exempt from the claims of creditors under the law of the State of Alaska. ⁵ Petitioners maintain that, pursuant to Cole and Hunt, petitioners' fishing permit should be excluded in performing the insolvency calculation under section 108(d)(3). If the Court were to sustain petitioners' position, the parties agree that petitioners would be insolvent within the meaning of section 108(d)(3) and that the insolvency exception of section 108(a)(1)(B) would exclude from their gross income for the year at issue $42,142 of DOI income resulting from the foreclosure sale on February 8, 1993.

[14] Respondent counters that Cole v. Commissioner, supra, and Hunt v. Commissioner, supra, on which petitioners rely do not apply in the instant case. According to respondent, the plain meaning of the word "assets", as well as the legislative history of section 108(a)(1)(B), rejects the narrow definition of that word which petitioners proffer. Respondent argues in the alternative that even if the Court were to sustain petitioners' position as to the meaning of the word "assets" as used in section 108(d)(3), petitioners have failed to show that petitioners' fishing permit is in all instances exempt from the claims of creditors under the law of the State of Alaska.

[15] Our function in interpreting the Code is to construe it in a way that will give effect to the intent of Congress. See Merkel v. Commissioner, 109 T.C. 463, 468 (1997), affd. 192 F.3d 844 (9th Cir. 1999). Our starting point in resolving the parties' dispute over the meaning of the word "assets" as used in section 108(d)(3) is the plain meaning of the language used by Congress. See American Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982); Merkel v. Commissioner, 192 F.3d 844, 848 (9th Cir. 1999), affg. 109 T.C. 463 (1997). Where, as is the case here, the statute does not define the word, ⁶ we generally interpret it by using its ordinary and common meaning. See Merkel v. Commissioner, 192 F.3d at 848 (quoting United States v. Iverson, 162 F.3d 1015, 1022 (9th Cir. 1998)). If the ordinary and common meaning of the statutory language in question supports only one construction, that statutory language is unambiguous. See id. (quoting California v. Montrose Chem. Corp., 104 F.3d 1507, 1514 (9th Cir. 1997)). However, where the ordinary and common meaning of the statutory language supports more than one interpretation, the statutory language is ambiguous, and we may consult legislative history to assist us in interpreting the language in question. See Merkel v. Commissioner, 109 T.C. at 468-469. We are to construe exclusions from income, like section 108(a)(1)(B), narrowly in favor of taxation. See Merkel v. Commissioner, 192 F.3d at 848 (citing United States v. Centennial Sav. Bank FSB, 499 U.S. 573, 583 (1991); Harbor Bancorp & Subsidiaries v. Commissioner, 115 F.3d 722, 732 (9th Cir. 1997)).

[16] Bearing in mind the foregoing principles of statutory construction, we shall consider initially respondent's contention that the plain meaning of the word "assets" supports only one construction of that word as used in section 108(d)(3). As pertinent here, the common and ordinary meaning of the word "assets" set forth in Merriam-Webster's Collegiate Dictionary 69 (10th ed. 1996) is:

     1 pl a : the property of a deceased person subject by law to the

[17] Congress enacted section 108(a)(1)(B) and related provisions (i.e., section 108(a)(3), (d)(3), and (e)(1)) into the Code in 1980 as part of the Bankruptcy Tax Act of 1980, Pub. L. 96- 589, sec. 2(a), 94 Stat. 3389 (1980 Bankruptcy Tax Act). The stated purpose of the 1980 Bankruptcy Tax Act was to "accommodate bankruptcy policy and tax policy." S. Rept. 96-1035 at 9-10 (1980), 1980-2 C.B. 620, 624. Such an accommodation was necessary after Congress made significant changes to the Federal bankruptcy laws in 1978 by passing the Bankruptcy Reform Act of 1978, Pub. L. 95-598, 92 Stat. 2549 (1978 Bankruptcy Reform Act), which enacted title 11 into the United States Code (title 11). In passing the 1980 Bankruptcy Tax Act, Congress "intended to complete the process of revising and updating Federal bankruptcy laws by providing rules governing the tax aspects of bankruptcy and related tax issues." Staff of Joint Comm. on Taxation, Description of H.R. 5043 (Bankruptcy Tax Act of 1980) as Passed by the House, at 3 (J. Comm. Print 1980). Both the Senate and House reports accompanying H.R. 5043, 96th Cong., 2d Sess. (1980) (H.R. 5043), which became the 1980 Bankruptcy Tax Act, indicate that the proposed insolvency exception in section 108(a)(1)(B) was intended to ensure that an insolvent debtor outside of bankruptcy (like a debtor coming out of bankruptcy who is accorded a "fresh start" under the Federal bankruptcy laws) is not to be burdened with an immediate tax liability. See S. Rept. 96-1035, supra, 1980-2 C.B. at 624; H. Rept. 96-833, at 9 (1980).

[18] The committee reports accompanying H.R. 5043 describe in pertinent part the tax law governing DOI income that was extant at the time Congress passed the 1980 Bankruptcy Tax Act, as follows:

          Under present law, income is realized when indebtedness is

[19] We shall discuss in greater detail the three cases referred to in the foregoing excerpt of the committee reports accompanying H.R. 5043. In United States v. Kirby Lumber Co., 284 U.S. 1 (1931), the Supreme Court of the United States (Supreme Court) established the rule that a debtor realizes (and must recognize) income when discharged of indebtedness, i.e., when relieved of indebtedness without full payment of the amount owed. In Kirby Lumber Co., the taxpayer had issued bonds for which it received par value. In the same year, the taxpayer repurchased some of those bonds in the open market for less than their par value issue price. See id. at 2. The Supreme Court held that the taxpayer must recognize income in an amount (i.e., $137,521.30) equal to the difference between the issue price and the repurchase price of the bonds in question. See id. at 2, 3. In so holding, the Supreme Court reasoned: "As a result of its [tax payer's] dealings it made available $137,521.30 [of] assets previously offset by the obligation of bonds now extinct." Id. at 3.

[20] Several years after the Supreme Court decided Kirby Lumber Co., the U.S. Court of Appeals for the Fifth Circuit distinguished that case and established an insolvency exclusion to the rule that the Supreme Court had announced in that case. See Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 F.2d 95 (5th Cir. 1934), revg. 27 B.T.A. 651 (1933). In Dallas Transfer & Terminal Warehouse Co., the taxpayer was relieved of indebtedness as the lessee of certain real property with respect to unpaid rent and other bills totaling $107,881 when it conveyed to the lessor of that property certain real property of lesser value (i.e., $42,507) in which the taxpayer's equity at the time of conveyance was $17,507. See id. The Court of Appeals held that the taxpayer did not realize income as a result of that transaction. See id. at 96. In so holding, the Court of Appeals stated:

     In effect the transaction was similar to what occurs in an

     The instant case is substantially different from the [Kirby

[21] In Lakeland Grocery Co. v. Commissioner, 36 B.T.A. 289 (1937), the Board of Tax Appeals (Board) considered the insolvency exclusion established by Dallas Transfer & Terminal Warehouse Co. v. Commissioner, supra. In Lakeland Grocery Co., the taxpayer entered into a so-called composition settlement under which the taxpayer paid its creditors $15,473 in consideration of being relieved of its indebtedness to those creditors in the amount of $104,710. Prior to entering into the composition settlement, the taxpayer was insolvent. After that settlement, the taxpayer had net assets of $39,597, which, as noted by the Board, "were freed from the claims of creditors as a result of the * * * [discharge of indebtedness]." Lakeland Grocery Co. v. Commissioner, supra at 291. The Board distinguished Dallas Transfer & Terminal Warehouse Co. v. Commissioner, supra, from the facts before it and concluded that the rationale of United States v. Kirby Lumber Co., 284 U.S. 1 (1931), was applicable to those facts. See Lakeland Grocery Co. v. Commissioner, supra at 291-292. The Board held that the taxpayer realized gain to the extent of the value of the assets freed from the claims of its creditors, i.e., to the extent it had assets (i.e., $39,597) which ceased to be offset by any liability. See id. at 292.

[22] We recently had occasion in Merkel v. Commissioner, 109 T.C. 463 (1997), to review the three cases (United States v. Kirby Lumber Co., supra, Dallas Transfer & Terminal Warehouse Co. v. Commissioner, supra, and Lakeland Grocery Co. v. Commissioner, supra) to which the committee reports accompanying H.R. 5043 refer and which we discuss above. In Merkel, as here, we had to determine whether a debtor qualified for the insolvency exception in section 108(a)(1)(B). However, in order to resolve that issue in Merkel, we had to determine the meaning of the word "liabilities" as used in the definition of the term "insolvent" in section 108(d)(3). See Merkel v. Commissioner, supra at 466-467.

[23] We observed in Merkel:

          The Board's approach to a taxpayer in financial distress

[24] With the foregoing in mind, we shall now consider petitioners' argument that we follow Cole v. Commissioner, 42 B.T.A. 1110 (1940), in defining the word "assets" as used in the definition of the term "insolvent" in section 108(d)(3). ⁷ In Cole, the Board began its analysis by acknowledging that under Lakeland Grocery Co. v. Commissioner, 36 B.T.A. 289 (1937), the taxpayer, a resident of New York, would realize income upon the discharge of his indebtedness "to the extent of the excess of total assets over total liabilities immediately after * * * [discharge]." Cole v. Commissioner, supra at 1112. In determining whether there was such an excess, the Board stated:

          In determining the amount in [sic] which petitioner's net

[25] We reject petitioners' argument that we apply Cole in this case. When Congress enacted the insolvency exception into the Code as section 108(a)(1)(B), one of the related provisions it also enacted is section 108(e)(1). ⁸ Section 108(e)(1) provides that, for purposes of title 26 of the United States Code (i.e., the Internal Revenue Code, including section 61(a)(12)), "there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness" except as provided in section 108(a)(1)(B). As the Supreme Court very recently stated, "Section 108(e)[(1)] precludes us from relying on any understanding of the judicial insolvency exception that was not codified in '108." Gitlitz v. Commissioner, 531 U.S. at __, 69 U.S.L.W. at 4063. Even before Gitlitz was decided, we reached a similar conclusion in Merkel v. Commissioner, 109 T.C. 463 (1997). We stated in pertinent part:

          As Congress enacted the insolvency exclusion [section

[26] We conclude that section 108(e)(1) precludes in this case (or in any other case involving the insolvency exception in section 108(a)(1)(B)) the application of Cole v. Commissioner, supra, and any other judicially developed insolvency exception to the general rule of section 61(a)(12) that gross income includes income from the discharge of indebtedness. See Gitlitz v. Commissioner, supra at , 69 U.S.L.W. at 4063; Merkel v. Commissioner, supra at 481.

[27] Our conclusion that Cole v. Commissioner, 42 B.T.A. 1110 (1940), has no application in the instant case not only carries out the directive of section 108(e)(1), it also carries out the intention of Congress in enacting section 108(d)(3) that assets exempt from the claims of creditors under applicable State law are not to be excluded in determining the fair market value of a taxpayer's assets for purposes of ascertaining whether the taxpayer is insolvent within the meaning of section 108(d)(3). Congress' intention is disclosed by an examination of section 108(d)(3) together with the 1978 Bankruptcy Reform Act and its legislative history and the 1980 Bankruptcy Tax Act and its legislative history. One of the stated policies of the 1978 Bankruptcy Reform Act was "to provide a fresh start", S. Rept. 95-989, at 6 (1978), for debtors coming out of bankruptcy. The principal mechanism adopted by Congress in the 1978 Bankruptcy Reform Act for providing such a "fresh start" in the Federal bankruptcy laws is through the discharge of debts. ⁹ See id. at 98.

[28] Congress also adopted another method in the 1978 Bankruptcy Reform Act for providing a "fresh start" to debtors coming out of bankruptcy, namely, allowing debtors in bankruptcy to retain after bankruptcy certain property classified as exempt property for purposes of title 11 (title 11 exempt property), which includes property exempt from the claims of creditors under applicable State law. See 1978 Bankruptcy Reform Act, Pub. L. 95-598, sec. 522(b)(2)(A), 92 Stat. 2549, 2586, 11 U.S.C. sec. 522(b)(2)(A) (Supp. II, 1978); ¹⁰ see also S. Rept. 95-989, supra at 6. The role of title 11 exempt property in the Federal bankruptcy laws is evidenced by, for example, the definition of the term "insolvent" for purposes of title 11 that Congress adopted in section 101(26) of the 1978 Bankruptcy Reform Act, 92 Stat. 2553, 11 U.S.C. sec. 101(26) (Supp. II, 1978). ¹¹ In determining whether a debtor in bankruptcy is insolvent for purposes of title 11, the debtor's title 11 exempt property, which includes property exempt from the claims of creditors under applicable State law, is excluded from the property he otherwise owns. See 1978 Bankruptcy Reform Act, sec. 101(26), 11 U.S.C. sec. 101(26) (Supp. II, 1978).

[29] When it passed the 1980 Bankruptcy Tax Act, Congress was aware of the role that it had decided to give title 11 exempt property in the 1978 Bankruptcy Reform Act. In particular, when Congress enacted into the Code the insolvency exception in section 108(a)(1)(B) and the definition of "insolvent" in section 108(d)(3), it knew that it had decided to, and did, define the term "insolvent" in section 101(26) of the 1978 Bankruptcy Reform Act, 11 U.S.C. sec. 101(26) (Supp. II, 1978), to exclude specifically title 11 exempt property of a debtor in bankruptcy, including property exempt from the claims of creditors under applicable State law, in determining whether that debtor is insolvent for purposes of the Federal bankruptcy laws. See S. Rept. 96-1035 at 24 (1980), 1980-2 C.B. 620, 632. ¹² However, Congress decided to, and did, adopt a different definition of the term "insolvent" in section 108(d)(3) for purposes of section 108. Unlike the definition of the term "insolvent" in section 101(26) of the 1978 Bankruptcy Act, 11 U.S.C. sec. 101(26) (Supp. II, 1978), which Congress adopted for purposes of the Federal bankruptcy laws, the definition of that term which Congress adopted for purposes of section 108 does not specifically exclude assets of a debtor that are exempt from the claims of creditors under applicable State law or any other title 11 exempt property in determining whether the debtor is insolvent. We conclude that the decision of Congress not to define the term "insolvent" in section 108(d)(3) to exclude specifically such exempt assets in determining whether a debtor is insolvent for purposes of section 108 was intentional. ¹³ We further conclude that Congress did not intend to exclude assets exempt from the claims of creditors under applicable State law from a taxpayer's assets for purposes of determining whether the taxpayer is insolvent within the meaning of section 108(d)(3). If Congress had intended to exclude such exempt assets from a taxpayer's assets in determining whether the taxpayer is insolvent for purposes of section 108, Congress would have so stated in section 108(d)(3). It did not.

[30] Our conclusion that Cole v. Commissioner, 42 B.T.A. 1110 (1940), has no application in the instant case also leads to a result that comports with the intention of Congress in enacting section 108(a)(1)(B) and related provisions into the Code. As we explained in Merkel v. Commissioner, 109 T.C. at 475,

     Congress' indicated purpose of not burdening an insolvent debtor

[32] We hold that the word "assets" as used in the definition of the term "insolvent" in section 108(d)(3) includes assets exempt from the claims of creditors under applicable State law. ¹⁵ The parties agree that if we were to so hold, petitioners would not be "insolvent" within the meaning of section 108(d)(3), and the insolvency exception of section 108(a)(1)(B) would not apply to the $42,142 of DOI income resulting from the foreclosure sale in question. Consequently, we sustain respondent's determination to include that DOI income in petitioners' gross income for the year at issue.

ACCURACY-RELATED PENALTY -- SECTION 6662

[33] Respondent determined that petitioners are liable for the year at issue for the accuracy-related penalty under section 6662(a). In the notice and on brief, respondent asserted two alternative grounds for the imposition of that penalty: A substantial understatement of income tax under section 6662(b)(2) and negligence under section 6662(b)(1).

[34] Respondent concedes that if the Court were to hold that petitioners must recognize the DOI income at issue, the accuracy- related penalty should not be imposed on that portion of the underpayment of tax attributable to that income. That is because respondent takes the position that petitioners made an adequate disclosure under section 6662(d)(2)(B)(ii)(I) and that they had a reasonable basis under section 6662(d)(2)(B)(ii)(II) for their treatment of such income in petitioners' joint return.

[35] Petitioners concede that the accuracy-related penalty should be imposed on the remaining portion of the underpayment of tax except to the extent it relates to the capital gain that they concede on brief they realized and must recognize as a result of the foreclosure sale of the Yantari (petitioners' capital gain). With respect to the accuracy-related penalty relating to the portion of the underpayment of tax attributable to petitioners' capital gain, petitioners contend that

     Petitioners made the same disclosure as it applies to the gain

[37] Section 6662(a) imposes an accuracy-related penalty equal to 20 percent of the underpayment of tax resulting from, inter alia, a substantial understatement of income tax, see section 6662(b)(2), or negligence or disregard of rules or regulations, see section 6662(b)(1). The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment if it is shown that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, such portion. See sec. 6664(c)(1).

[38] An understatement is equal to the excess of the amount of tax required to be shown in the tax return over the amount of tax shown in the tax return, see sec. 6662(d)(2)(A), and is substantial in the case of an individual if it exceeds the greater of 10 percent of the tax required to be shown or $5,000, see sec. 6662(d)(1)(A). However, the amount of such understatement is to be reduced by that portion of the understatement which is attributable to any item where (1) "the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return," sec. 6662(d)(2)(B)(ii)(I) (adequate disclosure), and (2) "there is a reasonable basis for the tax treatment of such item by the taxpayer", sec. 6662(d)(2)(B)(ii)(II) (reasonable basis).

[39] For purposes of section 6662(a), the term "negligence" includes any failure to make a reasonable attempt to comply with the Code, and the term "disregard" includes any careless, reckless, or intentional disregard. See sec. 6662(c). Negligence has also been defined as a lack of due care or failure to do what a reasonable person would do under the circumstances. See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).

[40] We turn first to petitioners' position with respect to respondent's determination under section 6662(a) and (b)(2). On the record before us, we find that petitioners have failed to establish that they adequately disclosed in petitioners' joint return or in any statement attached to that return the relevant facts affecting the tax treatment of petitioners' capital gain, as required by section 6662(d)(2)(B)(ii)(I). For example, there are no facts disclosed either in that return or in a statement attached to that return regarding the foreclosure sale of the Yantari, the amount realized on that sale, or petitioners' basis in the Yantari.

[41] We further find on the instant record that petitioners have failed to show that they had a reasonable basis for their failure to report petitioners' capital gain in petitioners' joint return, as required by section 6662(d)(2)(B)(ii)(II). As noted above, as we understand their position, petitioners contend that they did not know that the value of the Yantari when it was sold at the foreclosure sale was $95,000. Apparently, petitioners maintain that they believed that the value of the Yantari at that time was less than $95,000, although they did not disclose in petitioners' joint return, and they do not indicate on brief, what they determined that value to be. Nonetheless, according to petitioners, "there was no capital gain" when the Yantari was sold at the foreclosure sale. We reject petitioners' position. It is well established that, absent clear and convincing proof to the contrary, the sale price of property at a foreclosure sale is presumed to be its fair market value. See, e.g., Frazier v. Commissioner, 111 T.C. 243, 246 (1998); Community Bank v. Commissioner, 79 T.C. 789, 792 (1982), affd. 819 F.2d 940 (9th Cir. 1987). Petitioners have presented no evidence, let alone clear and convincing evidence, that the $95,000-sale price of the Yantari at the foreclosure sale was not its fair market value.

[42] Furthermore, section 1001(a) provides that gain from a sale or other disposition of property is the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain. The regulations under section 1001 provide guidance to taxpayers in applying section 1001(a) to facts that are analogous to the facts presented in the instant case. Example (8) of section 1.1001-2(c), Income Tax Regs. (Example (8)), ¹⁶ states:

     In 1980, F transfers to a creditor an asset with a fair market

[44] On the record before us, we find that, in the event the computations under Rule 155 establish that there is an understatement of tax as a result of our holdings and the parties' concessions in this case that is greater than 10 percent of the tax required to be shown in petitioners' joint return or $5,000, see sec. 6662(d)(1)(A), petitioners have failed to establish there is no substantial understatement of tax under section 6662(b)(2) and (d).

[45] We turn now to respondent's determination under section 6662(a) and (b)(1). For the reasons set forth above explaining why we found that petitioners failed to show that they had a reasonable basis for their position in petitioners' joint return regarding petitioners' capital gain, we find on the record before us that petitioners have failed to show that, in not reporting that gain, (1) they made a reasonable attempt to comply with, and did not intentionally disregard, section 1001 and the regulations thereunder, including Example 8, Frazier v. Commissioner, supra, and Community Bank v. Commissioner, supra, and (2) they acted with due care and did what a reasonable person would do under the circumstances. We further find on that record that petitioners have failed to establish that they were not negligent in failing to report that gain in that return.

[46] On the instant record, we also find that petitioners have failed to show that they acted with reasonable cause and in good faith with respect to the portion of the underpayment of tax for 1993 that is attributable to petitioners' capital gain. See sec. 6664(c).

[47] Based on our examination of the entire record before us, we find that petitioners have failed to establish any error in respondent's determination that they are liable for the year at issue for the accuracy-related penalty under section 6662(a) insofar as it relates to the underpayment of tax attributable to petitioners' capital gain. Consequently, we sustain that determination to that extent.

[48] We have considered all of the contentions and arguments of petitioners that are not discussed herein, and we find them to be without merit and/or irrelevant. To reflect the foregoing and the concessions of the parties,

[49] Decision will be entered under Rule 155.

² Petitioners' description of petitioners' liabilities immediately preceding the foreclosure sale on Feb. 8, 1993, and the amounts thereof stipulated by the parties are:

 Description of                  Amount of

 Asset                                Fair Market Value

⁵ Petitioners also contend that certain other assets, i.e., petitioners' principal residence, petitioners' household goods and wearing apparel, petitioners' tools of the trade, and petitioners' motor vehicle (collectively, petitioners' other assets), are assets exempt from the claims of creditors under applicable State law to the extent of $54,000, $3,000, $2,800, and $3,000, respectively. According to petitioners, those assets also are not to be included in petitioners' assets in performing the calculation set forth in sec. 108(d)(3) for determining whether petitioners are insolvent (insolvency calculation). Assuming arguendo that we were to hold that the word "assets" as used in sec. 108(d)(3) does not include assets that are exempt from the claims of creditors under applicable State law and that petitioners' fishing permit is an asset that is exempt from the claims of creditors under the law of the State of Alaska, petitioners would be insolvent within the meaning of sec. 108(d)(3) without regard to whether a total of $62,800 of petitioners' other assets that petitioners claim are exempt from the claims of creditors under applicable State law are to be excluded in the insolvency calculation under that section. Conversely, assuming arguendo that we were to hold that the word "assets" as used in sec. 108(d)(3) does not include assets that are exempt from the claims of creditors under applicable State law and that a total of $62,800 of petitioners' other assets are exempt from the claims of creditors under applicable State law, petitioners would not be insolvent within the meaning of sec. 108(d)(3) unless petitioners' fishing permit were exempt from the claims of creditors under applicable State law and were to be excluded in performing the insolvency calculation under that section. Consequently, we shall address petitioners' argument regarding the meaning of the word "assets" as used in sec. 108(d)(3) in the context solely of petitioners' fishing permit, and not in the context of petitioners' other assets, all of which they claim are exempt from the claims of creditors under applicable State law.

⁶ When Congress defined the term "insolvent" in sec. 108(d)(3) to mean the excess of liabilities over the fair market value of assets, it did not provide in sec. 108 a definition of the word "assets" (or the word "liabilities", see Merkel v. Commissioner, 109 T.C. 463, 468 (1997), affd. 192 F.3d 844 (9th Cir. 1999)). Nor does the Code contain any generally applicable definition of the word "assets" (or the word "liabilities", see id.). The regulations promulgated under sec. 108 do not elaborate on the definition of the term "insolvency" in sec. 108(d)(3) and do not define the word "assets" (or the word "liabilities", see id.) used in that definition.

⁷ Petitioners also urge us to follow Hunt v. Commissioner, T.C. Memo. 1989-335. Petitioners argue that we previously held in Hunt that, for purposes of sec. 108(a)(1)(B), the word "assets" in sec. 108(d)(3) does not include assets exempt from the claims of creditors under applicable State law. We reject that argument and petitioners' characterization of Hunt as a case decided under sec. 108(a)(1)(B). Hunt involved tax year 1980. The insolvency exception in sec. 108(a)(1)(B) that was enacted into the Code as part of the 1980 Bankruptcy Tax Act became effective for transactions occurring after Dec. 31, 1980. See 1980 Bankruptcy Tax Act, Pub. L. 96-589, sec. 7(a)(1), 94 Stat. 3411. Although in certain circumstances Congress made available to debtors in bankruptcy cases or similar judicial proceedings an election to substitute Sept. 30, 1979, as the effective date of the 1980 Bankruptcy Tax Act, see id. at sec. 7(f)(1), there is no indication in Hunt that the taxpayers involved there made such an election, see Hunt v. Commissioner, supra. Our discussion in Hunt of sec. 108 as amended by the 1980 Bankruptcy Tax Act (amended sec. 108) is dictum and appears in Hunt after we resolved the issue presented to us with respect to DOI income under the tax law that was extant prior to the passage of the 1980 Bankruptcy Tax Act. See Hunt v. Commissioner, supra. In this connection, it is noteworthy that we began our discussion of amended sec. 108 in Hunt by stating: "Furthermore, the correctness of our result is reinforced by the language of [amended] section 108." Id.

⁸ When Congress "codified the net assets test in section 108(a)(1)(B), (a)(3), and (d)(3)," Merkel v. Commissioner, 109 T.C. at 473, it codified the net assets test developed by Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 F.2d 95 (5th Cir. 1934), revg. 27 B.T.A. 651 (1933), and Lakeland Grocery Co. v. Commissioner, 36 B.T.A. 289 (1937). It did not codify the application of the net assets test by Cole v. Commissioner, 42 B.T.A. 1110 (1940). The committee reports accompanying H.R. 5043 make no reference to and do not describe the holding of Cole, whereas those reports do refer to and describe the holdings of Dallas Transfer & Terminal Warehouse Co. and Lakeland Grocery Co. Nor do those committee reports refer to the two cases that applied Cole v. Commissioner, supra, which had been decided as of the time Congress passed the 1980 Bankruptcy Tax Act, i.e., Davis v. Commissioner, 69 T.C. 814, 833-834 (1978), and Estate of Marcus v. Commissioner, T.C. Memo. 1975-9. See also Babin v. Commissioner, T.C. Memo. 1992-673, affd. on other grounds 23 F.3d 1032 (6th Cir. 1994); Hunt v. Commissioner, supra, decided after Congress passed that Act.

⁹ The discharge-of-debt provisions of the 1978 Bankruptcy Reform Act, Pub. L. 95-598, sec. 727, 92 Stat. 2609, are described in the accompanying Senate report as "the heart of the fresh start provisions of the bankruptcy law". S. Rept. 95-989, at 7, 98 (1978).

¹⁰ Although there have been amendments to 11 U.S.C. sec. 522(b) as originally enacted that were in effect for the year at issue, those amendments are not material to a resolution of the issue presented here under sec. 108. See 11 U.S.C. sec. 522(b) (1994).

¹¹ Sec. 101(26) of the 1978 Bankruptcy Reform Act provides:

          (26) "insolvent" means --

Sec. 522(b) of the 1978 Bankruptcy Reform Act, 92 Stat. 2586, 11 U.S.C. sec. 522(b) (Supp. II, 1978), which allows a debtor in bankruptcy to exclude exempt title 11 property from property of the debtor's bankruptcy estate, provides:

          (b) Notwithstanding section 541 of this title, an

¹² The Senate report accompanying the 1980 Bankruptcy Tax Act states in pertinent part:

          Under bankruptcy law, the commencement of a liquidation or

¹³ In this regard, Myron M. Sheinfeld (Mr. Sheinfeld), a witness who testified at the Congressional hearings on H.R. 5043 as passed by the House of Representatives (House), see H.R. 5043, 96th Cong., 1st Sess. (1979), pointed out at those hearings that the definition of "insolvent" in H.R. 5043 as passed by the House was different from the definition of that term in title 11 and that "the differing definitions of insolvent will, unless made consistent, cause substantial trouble and litigation." Hearings on H.R. 5043 Before the Subcomm. on Select Revenue Measures of the House Comm. on Ways and Means (Hearings on H.R. 5043), 96th Cong., 1st Sess. 41 (1979) (statement of Myron M. Sheinfeld, Chairman, Committee on Tax Matters, National Bankruptcy Conference). Mr. Sheinfeld recommended that Congress adopt as the definition of the term "insolvent" in the final version of H.R. 5043 the same definition of the term "insolvent" that Congress had adopted in sec. 101(26) of the 1978 Bankruptcy Reform Act, 11 U.S.C. sec. 101(26) (Supp. II, 1978). See Hearings on H.R. 5043, supra at 43. Congress chose not to do so.

/14 /Not only did petitioners have the ability to pay an immediate tax on the DOI income at issue, petitioners' fishing permit is subject to lien and levy by respondent to pay that tax. See secs. 6321, 6331. In this regard, apparently there has been some dispute between the State of Alaska and the Internal Revenue Service as to whether permits like petitioners' fishing permit constitute property or a right to property for purposes of secs. 6321 and 6331. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3445(c)(2), 112 Stat. 763; 144 Cong. Rec. S4518 (daily ed. May 7, 1998) (statement of Sen. Stevens) ("The State of Alaska has never conceded that these permits are property that may be seized by IRS. Yet, the IRS seizes them".). However, in the instant case, the parties stipulated that petitioners' fishing permit is an asset (i.e., property).

In addition, it is noteworthy that, effective Aug. 1, 2000, petitioners may obtain a loan in an amount which does not exceed $30,000, see Alaska Stat. sec. 16.10.310 (Lexis 2000), and which is secured by petitioners' fishing permit in order "to satisfy past due federal tax obligations that may result in the execution on and involuntary transfer of [that permit]". Alaska Stat. sec. 16.10.310(a)(1)(A)(iii) (Lexis 2000).

¹⁵ Assuming arguendo that we had found that the word "assets" as used in sec. 108(d)(3) does not include assets exempt from the claims of creditors under applicable State law, we nonetheless find on the record before us that petitioners have failed to establish that petitioners' fishing permit qualifies in all instances as such an asset. On brief, petitioners rely on Alaska Stat. sec. 09.38.015(a)(8) (Lexis 2000), and on Alaska Stat. sec. 16.43.150(g) (Lexis 2000), to show that petitioners' fishing permit is exempt from creditors' claims under the laws of the State of Alaska. Petitioners are correct that Alaska Stat. sec. 09.38.015(a)(8) (Lexis 2000) generally exempts limited entry fishing permits like petitioners' fishing permit from the claims of creditors. See also Alaska Stat. sec. 09.38.500(5) (Lexis 2000). In addition, Alaska Stat. sec. 16.43.150(g)(1) (Lexis 2000) provides that such permits cannot be "pledged, mortgaged, leased, or encumbered in any way", except as specifically provided in certain enumerated sections of the Alaska statutes. However, petitioners fail to indicate that limited entry fishing permits, like petitioners' fishing permit, are not exempt from creditors' claims under Alaska law for all purposes and that such permits may be used to secure a loan for the payment of past due Federal tax obligations. For example, petitioners do not discuss the effect of Alaska Stat. sec. 09.38.065 (Lexis 2000), which allows under certain circumstances creditors to make claims against certain assets that are generally exempt from creditors' claims under certain provisions of the Alaska statutes. In addition, petitioners do not mention that petitioners' fishing permit is subject to lien and levy by respondent. See supra n.14. Nor do petitioners address the effect of recently enacted legislation in Alaska that allows petitioners to obtain a loan in an amount not exceeding $30,000, secured by petitioners' fishing permit, in order to pay their past due Federal tax liabilities that may result in the execution on and involuntary transfer of petitioners' fishing permit. See supra n.14.

/16 /Example (8) applies to the discharge of indebtedness that is recourse in nature. While the parties did not expressly stipulate that petitioners' loan to finance the purchase of the Yantari constituted recourse debt, we infer from certain other stipulations of the parties that that loan was recourse debt. The parties stipulated that the foreclosure sale resulted in both DOI income and capital gain, although petitioners dispute whether they must recognize that DOI income. DOI income and capital gain would result from the foreclosure sale only if petitioners' debt were recourse debt. See Frazier v. Commissioner, 111 T.C. 243, 245, 247 (1998); sec. 1.1001-2(a)(1) and (2) and 2(c), Example (8), Income Tax Regs.