T.C. Summary Opinion 2003-90
UNITED STATES TAX COURT
JAMES LEO ARMSTRONG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4834-00S. Filed July 16, 2003.
James Leo Armstrong, pro se.
Monica J. Miller, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed.1 The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1997,
the taxable year in issue, and all Rule References are to the Tax
Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s Federal
income tax for the taxable year 1997 in the amount of $1,377.
The issue for decision is whether petitioner received income
from cancellation of indebtedness. We hold that he did.
Background
Some of the facts have been stipulated, and they are so
found. Petitioner resided in Lantana, Florida, at the time that
his petition was filed with the Court.
In or about 1991, petitioner began to incur debt on a credit
card issued to him by Mellon Bank. Petitioner incurred the debt
in helping to finance a home improvement project for a woman with
whom he was romantically involved. Subsequently, after the
relationship had soured, petitioner asked the woman for payment,
but she refused. Petitioner continued to carry a balance on his
credit card account.
In 1995, petitioner commenced an action against the woman in
the county court for Palm Beach County, Florida. In the action,
petitioner sought to recover based on an alleged oral contract
between the woman and him. In January 1996, judgment was entered
against petitioner on the ground that he was not a licensed
contractor and, therefore, was not entitled under Florida law to
recover on the alleged oral contract. Petitioner did not appeal
the judgment, nor did he otherwise further pursue the matter
against the woman. At no relevant time was the woman insolvent
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or bankrupt.
By the beginning of 1997, the taxable year in issue,
petitioner was (and had been for some time) in arrears in the
payment of his credit card balance with Mellon Bank. Later that
year, under circumstances not disclosed in the record, Mellon
Bank forgave petitioner the debt, some $5,513, owed on his credit
card account.
Petitioner was not insolvent in 1997, nor did he file for
bankruptcy during that year.
Mellon Bank issued to petitioner, and filed with respondent,
a Form 1099-C, Cancellation of Debt, reporting the cancellation
of indebtedness in 1997 in the amount of $5,513. Petitioner did
not report any part of this amount on his Federal income tax
return for that year.
Subsequently, respondent determined that petitioner failed
to report on his tax return for 1997 income from discharge of
indebtedness in the amount of $5,513. Petitioner timely filed a
petition disputing respondent’s determination “due to the fact I
did not have an economic gain from the consideration.”
Petitioner also attached to the petition a statement alleging
that the home improvement project he helped finance was producing
rent that was not being reported by the woman he had assisted.
Petitioner concluded his statement with the following offer:
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You have not nor will you ever see a tax dollar from
this property without my information. Therefore, if
you are willing [to] forgive my tax liability for 1997
(I did not benefit from this debt) I will provide you
with her name (only one like it) and the address of the
rental property that you are not collecting tax dollars
on (a lot of tax dollars). To acknowledge your
acceptance of my request, please send me a form 201 (to
pay a commission) and I will then send you her name and
address.
Discussion
A. Applicable Principles
Respondent’s determination in the notice of deficiency is
presumed correct, and petitioner must prove such determination
incorrect in order to prevail.2 Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. 111, 115 (1933).
Section 61(a) provides that “gross income means all income
from whatever source derived” except as otherwise provided. The
definition of gross income is broad in scope, Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955), and exclusions
from gross income are narrowly construed, United States v. Burke,
504 U.S. 229, 248 (1992); United States v. Centennial Sav. Bank
FSB, 499 U.S. 573, 583 (1991).
It is beyond dispute that gross income includes income from
the discharge of indebtedness. Sec. 61(a)(12); sec. 1.61-12(a),
Income Tax Regs. As explained by the United States Supreme
2
Petitioner does not contend that sec. 7491(a) is
applicable to this case, nor is it.
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Court, the general theory is that to the extent that a taxpayer
has been released from indebtedness, the taxpayer has realized an
accession to income because the cancellation of indebtedness
effects a freeing of assets previously offset by the liability
arising from such indebtedness. United States v. Kirby Lumber
Co., 284 U.S. 1 (1931); see Cozzi v. Commissioner, 88 T.C. 435,
445 (1987). Thus, petitioner’s argument that he did not benefit
economically from the cancellation of his indebtedness to Mellon
Bank is simply not correct.
A discharge of indebtedness generally produces income in an
amount equal to the difference between the amount due on the
obligation and the amount paid for the discharge. If no
consideration is paid for the discharge, then the entire amount
of the debt is considered the amount of income that the debtor
must include in income. Sec. 61(a)(12). In the present case,
the amount owed by petitioner to Mellon Bank at the time of the
discharge was $5,513, and the amount paid by petitioner to Mellon
Bank for the discharge was $0. Accordingly, the amount that
petitioner must include in income is $5,513, as determined by
respondent.
Admittedly, there are both statutory and common law
exceptions to the rule requiring the recognition of income from
the discharge of indebtedness. E.g., sec. 108(a), Zappo v.
Commissioner, 81 T.C. 77, 85-86 (1983). Thus, for example, gross
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income does not include any amount that would be includable in
gross income by reason of the discharge of indebtedness if the
discharge occurs in the context of a bankruptcy case or when the
taxpayer is insolvent. However, none of these exceptions has
been shown to apply in the present case.
Finally, we recognize that the debt incurred by petitioner
on his Mellon Bank credit card could be viewed as giving rise to
a series of loans, rather than gifts, from petitioner to the
woman, the nonpayment of which could give rise to a bad debt
deduction. See sec. 166. This view would require petitioner to
prove, inter alia, that: (1) A bona fide debt existed; (2) the
debt became worthless; and (3) worthlessness occurred during the
taxable year in issue. See secs. 1.166-1(a), (c), and 1.166-2(a)
through (c), Income Tax Regs.
Petitioner’s testimony at trial, if accepted at face value,
might suffice to prove that a bona fide debt existed. However,
whether the debt became worthless is problematic. In any event,
assuming that it did, the record would not support a finding that
the debt became worthless during the taxable year in issue.
Accordingly, we are unable to conclude that petitioner is
entitled to a bad debt deduction.
B. Conclusion
For the reasons set forth above, respondent’s determination
is sustained.
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Reviewed and adopted as the report of the Small Tax Case
Division.
To give effect to our disposition of the disputed issue,
Decision will be entered
for respondent.