abandoned the property. The property has continued to be held by Lakewood for future use or sale. We hold that there was not a loss realization event with respect to the zoning laws. To characterize the loss as ordinary under section 1231, petitioner, at very least, would have to show that land use regulations constitute an involuntary conversion. Section 1.1231-1(e), Income Tax Regs., defines involuntary conversion of property as follows: the conversion of property into money or other property as a result of complete or partial destruction, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof. Losses upon the complete or partial destruction, theft, seizure, requisition, or condemnation of property are treated as losses upon an involuntary conversion whether or not there is a conversion of the property into other property or money *** Government land use regulations, such as local zoning law or Federal wetland regulations, rarely constitute a condemnation of property under eminent domain powers. See Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992); United States v. Riverside Bayview Homes, Inc., 474 U.S. 121 (1985); Agins v. City of Tiburon, 447 U.S. 255 (1980). Condemnation requires property to be taken against the taxpayer's will by a public or quasi-public entity exercising the power of eminent domain. Koziara v. Commissioner, 86 T.C. 999, 1006-1007 (1986), affd. 841 F.2d 1126 (6th Cir. 1988). A condemnation or involuntary conversion of property as defined under section 1231 has not occurred in this case. Considering the question of the effect of the 1989 manual and the MOA, it was possible that they adversely affected the value of the Elbow Lake property for agricultural use, causing a reduction in value of the property below the $1 million determined by petitioner's expert. Petitioner, however, only argues that the newly issued Federal wetland regulations prevented Lakewood's use of the Elbow Lake property for residential development and contends that the value of the land is $1 million based on agriculture as the highest and best use of the property. At trial, petitioner presented four wetlands experts who provided credible and convincing testimony that it was highly unlikely that Lakewood would be granted a section 404 permit by the Corps to develop single-family residences on the Elbow Lake property. One expert, Bernard Goode, who was employed as an engineer by the Corps for 34 years, believed that there was a "very low likelihood" that under the 1989 manual, the Corps would grant a section 404 permit to Lakewood for the proposed residential development or that Lakewood's residential project could have been developed in an economically feasible manner. Mr. Goode's testimony was corroborated by the other expert witnesses who testified that it would be "virtually impossible" to obtain a section 404 permit or to develop the Elbow Lake property after the 1989 manual. Conversely, petitioner's experts also believed that Lakewood could have obtained a section 404 permit under the terms of the 1987 manual and could have developed the Elbow Lake property for residential purposes in an economically feasible manner. Petitioner has not argued that Lakewood could not use the Elbow Lake property for agricultural use because of the terms of the 1989 manual and the MOA or that the Federal regulations affected Lakewood's use in any way other than preventing real estate development. Petitioner has chosen not to argue that there was a partial regulatory taking of the Elbow Lake property that would constitute a realization event for the loss in value of the property. Moreover, petitioner's own expert witness testified that the property was not worthless as agricultural property after 1989. Accordingly, we find that Lakewood is not entitled to the loss deduction claimed.5 On July 10, 1997, after the briefs were filed in this case, respondent filed a motion to reopen the record to permit the introduction of a certified copy of a petition filed by Lakewood on April 28, 1997, in the U.S. Court of Federal Claims. The petition seeks compensation in the amount of $10 million under the Fifth Amendment takings clause for the regulatory taking of the Elbow Lake property as a result of the issuance of the 1989 manual. On brief, petitioner had maintained that Lakewood had abandoned any claim for reimbursement under the Fifth Amendment for the loss in value of the Elbow Lake property caused by a regulatory taking. The petition that respondent seeks to enter into evidence 5 Although we are not factually compelled to address the question of whether the Federal wetland regulations cause a tax recognizable event, it appears that the result would be no different from that of a zoning limitation. relates to the issue of whether Lakewood would have a reasonable prospect to recovery for any loss that it sustained due to the 1989 manual and the MOA. Due to our holding in this case, we need not address the merits of respondent's motion to reopen the record and deny it as moot. To reflect the foregoing, Decision will be entered for respondent. DUDLEY B. AND LA DONNA K. MERKEL, PETITIONERS v. DAVID A. AND NANCY J. HEPBURN, PETITIONERS v. RESPONDENT Docket Nos. 10031-95, 10032–95. Filed December 30, 1997. Ps realized income on account of the discharge of indebtedness. Ps excluded that income pursuant to the insolvency exclusion of sec. 108(a)(1)(B), I.R.C., by including certain "contingent" liabilities in the insolvency calculation of sec. 108(d)(3), I.R.C. Held, the term "liabilities" in sec. 108(d)(3), I.R.C., requires Ps to prove with respect to any obligation claimed to be a liability that Ps will be called upon to pay that obligation in the amount claimed. Held, further, Ps failed to prove that they would be called upon to pay any amount with respect to either of the obligations claimed to be liabilities. Held, further, Ps failed to prove that, on the measurement date, their liabilities exceeded the fair market value of their assets and, therefore, may not exclude any income under sec. 108(a)(1)(B), I.R.C. Gregory W. MacNabb, for petitioners. Ann M. Welhaf, for respondent. HALPERN, Judge: In these consolidated cases, respondent determined deficiencies in the Federal income tax of petitioners Dudley and La Donna Merkel and David and Nancy Hepburn for their 1991 taxable (calendar) years in the amounts of $115,420 and $116,347, respectively. Both cases involve similar circumstances and require us to determine whether petitioners in the two cases (the Merkels and the Hepburns, respectively) may exclude under section 108(a)(1)(B) certain income from the discharge of indebtedness. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference. At the time the petitions were filed, the Merkels and the Hepburns resided in Scottsdale and Paradise Valley, Arizona, respectively. Discharge of Indebtedness Income During 1991, the Merkels and the Hepburns were all partners in a partnership (the partnership) that, on September 1, 1991, realized income on account of the discharge of indebtedness. On their 1991 U.S. Individual Income Tax Returns (Forms 1040; filing status of married filing joint return), the Merkels and the Hepburns each (couple) disclosed their distributive share of that income, $359,721, but excluded such amount from gross income on the ground that each was insolvent immediately before that income was realized by the partnership. The SLC Indebtedness Systems Leasing Corp. (SLC) is an Arizona corporation organized in 1979 by petitioners Dudley Merkel and David Hepburn to engage in the computer leasing business. SLC is owned 50-50 by Dudley Merkel and David Hepburn. Dudley Merkel and David Hepburn were officers of SLC during its fiscal years ended February 29, 1992, and February 28, 1993, and received officer compensation for those years as follows: Dudley Merkel FYE 2/29/92 $183,202 FYE 2/28/93 $191,150 In 1986, SLC incurred an indebtedness to Security Pacific Bank (the indebtedness and the bank, respectively), evidenced by a note (the SLC note). The SLC note was personally guaranteed by each petitioner (collectively, petitioners' guarantees). As of April 16, 1991, the unpaid balance of the SLC note was in excess of $3,100,000, and SLC was in default of its obligations under the SLC note. On May 31, 1991, SLC, the bank, and petitioners, as guarantors, entered into an agreement (the agreement) containing the terms and conditions of a structured workout concerning the repayment of the indebtedness to the bank. The agreement, in part, provides as follows: (1) SLC is to pay to the bank $1,100,000 (the payoff) on or before August 2, 1991 (the settlement date); (2) the bank will release its security interest in the remaining collateral upon payment of the payoff by the settlement date; and (3) after the payoff by the settlement date, the bank will refrain from exercising any remedies under the SLC note or petitioners' guarantees if bankruptcy is not filed by or for SLC or petitioners, among others, voluntarily or involuntarily, within 400 days after the settlement date. SLC made the payoff by the settlement date, and the bank released its security interests in the remaining collateral of SLC. The other conditions of the agreement were met, and the bank, at the expiration of the 400-day period, released SLC from its liability as maker of the SLC note and petitioners from petitioners' guarantees. At no time did the bank make any formal written request or formal written demand for payment from petitioners pursuant to petitioners' guarantees. North Carolina's Sales and Use Tax SLC was engaged in the business of leasing computer systems in the State of North Carolina during the relevant period. The North Carolina Department of Revenue (the Department of Revenue) issued a "Notice of Sales and Use Tax Due" (the notice) to SLC dated June 14, 1991. The notice identifies the amount of taxes, penalties, and interest due, a total of $980,511.84, and states that the assessment is final and conclusive. The assessment of sales and use tax identified in the notice was for taxes that were never collected by SLC. After receipt of the notice, SLC's recourse was to pay the assessed amount and file a suit for refund or to protest the assessment if the Department of Revenue, in the exercise of |