T.C. Summary Opinion 2001-67
UNITED STATES TAX COURT
EDWARD D. AND DONNA L. JOHNS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13763-99S. Filed May 9, 2001.
Edward D. Johns, pro se.
Brandi B. Darwin (specially recognized) and Stephen R.
Takeuchi, for respondent.
PAJAK, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency of $4,538 and an addition
to tax under section 6651(a)(1) of $680 for 1996. Petitioners
concede that they should have included an additional $4 of
interest income in their gross income and that they are liable
for the failure to file addition to tax under section 6651(a)(1).
This Court must decide whether $13,938 of discharge of
indebtedness income is includable in petitioners' 1996 gross
income.
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in Ft. Myers, Florida, at the time
they filed their petition.
In 1996, the job of petitioner Edward Johns (petitioner) was
terminated. Petitioner knew he and his wife were overextended on
credit card debt and that they would be faced with financial
problems. Petitioners were headed for bankruptcy. Some of the
creditors offered petitioners a settlement for less than the full
amount of debt due. Petitioners paid a portion of the debts to
these creditors and in return the remainder of the debts were
discharged. Petitioners withdrew $17,511 from their retirement
account, and paid the early withdrawal penalty on this amount, in
order to use part of the amount to satisfy their debts.
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In 1996, on the dates set forth below, petitioners made the
following payments and the following portions of their credit
card loans were forgiven by the lenders.
Date Payments Discharge Total
MBNA Aug. 27 $1,300 $3,254 $4,554
MBNA Aug. 27 2,000 4,507 6,507
Barnett Bank N.A. Sept. 30 2,500 1,535 4,035
Nationsbank of
Delaware N.A. Oct. 29 3,605 4,642 8,247
Total of debts discharged $13,938
None of the aforementioned amounts included interest which
would have been deductible if paid. All of the debts that were
discharged were valid debts. Petitioners did not file for
bankruptcy in 1996. Petitioners did not include the $13,938 of
discharged debt in their gross income on their 1996 Federal
income tax return. Respondent determined that the income from
the discharge of petitioners' debts must be included in their
gross income because petitioners' creditors forgave the debts.
Based on the testimony and the exhibits presented at trial,
we find that petitioners had the following liabilities prior to
the discharge of the loans on August 27, 1996:
Fleet Mortgage $54,311
Nationsbank 8,247
MBNA America 4,554
MBNA America 6,507
Barnett Bank 4,035
Chemical Bank 9,238
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Bank of New York 7,574
G.E. Capital Credit 4,559
Florida Power and Light Credit Union 6,746
First North American National Bank 2,500
First Union Bank 15,253
$123,524
On August 27, 1996, petitioners had the following assets:
House, assessed value $55,490
FPL thrift plan 35,371
Thrift plan withdrawal 17,511
MetLife annuity 20,840
Van 5,000
Furniture, etc. 6,000
Automobile 3,000
Sedan 2,500
Cash and bank accounts 2,000
Trailer 100
$147,812
In addition, petitioners had potential interests in the FPL
pension plan and the Florida Retirement System, which we find
unnecessary to address in this case, as explained below.
On August 27, 1996, when the MBNA loans were discharged,
petitioners had assets of $147,812 and liabilities of $123,524.
On September 30, 1996, when the Barnett Bank N.A. loan was
discharged, petitioners had assets of $144,512 ($147,812 less the
payments to MBNA of $1,300 and $2,000) and liabilities of
$112,463 ($123,524 less the MBNA debts of $4,554 and $6,507).
On October 29, 1996, when the Nations Bank loan was
discharged, petitioners had assets of $142,012 ($144,512 less the
payment to Barnett Bank of $2,500) and liabilities of $108,428
($112,463 less the Barnett Bank debt of $4,035).
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Petitioner stated: "If I have to pay income tax on the
portion the [companies] cancelled I will have learned one thing.
It does not pay to try and do the right [and] moral thing, just
file bankruptcy [and] clear your debts." Petitioners contend
that they should not have to include the $13,938 of discharged
debt in their income because they were insolvent in 1996.
Respondent contends that petitioners were not insolvent in 1996
because all of petitioners' property should be included in the
calculation of the fair market value of their "assets" under
section 108(d)(3), regardless of whether some property is exempt
from creditors' claims under State law.
Under section 61(a)(12), gross income includes "all income
from whatever source derived, including * * * income from
discharge of indebtedness". Under certain circumstances, a
taxpayer may exclude from gross income the income from discharge
of indebtedness if the discharge occurs when the taxpayer is
insolvent. Sec. 108(a)(1)(B). The exclusion cannot exceed the
amount by which the taxpayer is insolvent. Sec. 108(a)(3). For
purposes of this section, "insolvent" is defined as "the excess
of liabilities over the fair market value of assets." Sec.
108(d)(3). Such a determination is to be made on the basis of
the taxpayer's assets and liabilities immediately before the
discharge. Sec. 108(d)(3).
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Under the Florida Constitution, Florida residents are
provided with a homestead exemption. Fla. Const. art. 10, sec. 4
(West 1965). Under this exemption, in general, the debtor's
residence and the debtor's personal property to the value of
$1,000 are exempt from creditors. Id. The Florida Statutes also
provide exemptions for annuities and certain pension, retirement,
and profit-sharing plans. Fla. Stat. Ann. secs. 222.14, 222.21
(West 1998). A debtor's interest, not to exceed $1,000 in value,
in a single motor vehicle is also exempt from creditors. Fla.
Stat. Ann. sec. 222.25 (West 1998). Therefore, under Florida
law, petitioners' creditors would not be able to attach
petitioners' home, $1,000 of the automobile, $1,000 of personal
property, the interests in the FPL Thrift Plan and the MetLife
annuity, and the potential interests in the FPL pension and the
Florida Retirement System.
Even so, for purposes of section 108(a)(1)(B) and (d)(3),
petitioners cannot exclude from their assets the property exempt
under Florida law. This Court recently held that property exempt
from creditors under State law may not be excluded from "assets"
when making an insolvency determination under section
108(a)(1)(B) and (d)(3). Carlson v. Commissioner, 116 T.C. 87
(2001).
As set forth above, on each of the three dates on which
petitioners’ debts were discharged, petitioners’ assets exceeded
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their liabilities. We understand that petitioners considered
themselves insolvent in 1996, but at all relevant times
petitioners were solvent at the time their debts were discharged
within the meaning of section 108(a).
Because petitioners were solvent, we need not address
whether the potential benefits under the FPL pension plan and the
Florida Retirement System, which petitioners had no access to in
1996, should be included in "assets". Nor do we need to decide
whether the fair market value of the home was greater than the
assessed value of the home.
On this record, we hold that petitioners must include the
$13,938 of discharged debt in their 1996 gross income, pursuant
to section 108(a)(1)(B).
To the extent we have not addressed any of the parties'
arguments, we have considered them and find them to be without
merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.