T.C. Summary Opinion 2003-169
UNITED STATES TAX COURT
CHARLES & MARIANNE T. ANDERSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4656-02S. Filed December 18, 2003.
Charles and Marianne T. Anderson, pro sese.
Daniel N. Price, for respondent.
DEAN, 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. Unless otherwise
indicated, subsequent 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.
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
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Respondent determined for 1999 a deficiency in petitioners’
Federal income tax of $420. After concessions,1 the issue
remaining for decision is whether petitioners failed to report
cancellation of indebtedness income in the amount of $1,372 for
taxable year 1999. Marianne Anderson has already conceded this
issue.
Background
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. Petitioners
resided in Georgetown, Texas, at the time the petition was filed.
This case involves unreported cancellation of indebtedness
income. Charles Anderson (petitioner) provided a credit card for
a friend, Ms. Feathers, on his existing Citibank account.
Although the account was in his name, petitioner and Ms. Feathers
agreed she would be responsible for the debts she incurred.
The Citibank Card Agreement applicable to petitioner’s
account states “You may request additional cards on your account
for yourself or others and you may permit another person to have
access to the card or account number. However, if you
1
In the notice of deficiency respondent determined that
petitioners failed to report interest income in the amount of
$120 and dividend income in the amount of $3 for taxable year
1999. Petitioners have conceded these issues.
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do, you must pay us for all charges made by those persons,
including charges for which you may not have intended to be
responsible.”
As petitioner received billing statements detailing charges
to the account, he forwarded them to Ms. Feathers for payment.
Ultimately, Ms. Feathers incurred $4,574.93 in charges on the
credit card.
Petitioner was subsequently contacted by a collection agency
on behalf of Citibank. He was informed of the $4,574.93
delinquent balance and was offered the opportunity to settle the
debt. In July 1999 petitioner settled the outstanding debt for
$3,202.45, or 70 percent of the total value. Citibank reported
$1,372 as cancellation of indebtedness income to respondent on
Form 1099-C, Cancellation of Debt. Petitioners did not report
this income on their joint income tax return. Petitioner denied
receiving a Form 1099-C reporting the amount of debt discharged.
Petitioner disputes having income from the discharge of
$1,372 of the debt and, raising a variety of arguments, contends
that a discharge of indebtedness does not constitute gross
income.
Discussion
Respondent's determinations in the notice of deficiency are
presumed correct, and, generally, petitioners must prove those
determinations wrong in order to prevail. Rule 142(a)(1); Welch
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v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof may
shift to the Commissioner under section 7491 in certain
circumstances. See Prince v. Commissioner, T.C. Memo. 2003-247.
The issue in this case is a question of law and does not depend
on which party has the burden of proof.
A. Discharge of Indebtedness
Gross income includes all income from whatever source
derived. Sec. 61(a). Discharge of indebtedness is specifically
included as an item of gross income. Sec. 61(a)(12). This means
that a taxpayer who has incurred a financial obligation, which
obligation is later discharged or released, has realized an
accession to income. Sec. 61(a)(12); United States v. Kirby
Lumber Co., 284 U.S. 1, 3 (1931); Friedman v. Commissioner, 216
F.3d 537, 545 (6th Cir. 2000), affg. T.C. Memo. 1998-196. The
rationale of this principle is that the discharge of a debt below
the face value of the debt accords the debtor an economic benefit
equivalent to income. Friedman v. Commissioner, 216 F.3d at 545.
The treatment of discharge-of-indebtedness income parallels
the Code's treatment of loans. Toberman v. Commissioner, 294
F.3d 985, 988 (8th Cir. 2002), affg. in part and revg. in part
T.C. Memo. 2000-221. Borrowed funds are not included in a
taxpayer’s income. Nor are repayments of a loan deductible from
income. When, however, one’s obligation to repay the funds is
settled for less than the amount of the loan, one ordinarily
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realizes income from discharge of indebtedness. Sec. 61(a)(12);
Warbus v. Commissioner, 110 T.C. 279, 284 (1998) (citing
Vukasovich, Inc. v. Commissioner, 790 F.2d 1409, 1413-1414 (9th
Cir. 1986), affg. in part and revg. in part T.C. Memo. 1984-611).
The difference between the face value of the debt and the amount
paid in satisfaction of the debt is includable in the taxpayer’s
gross income. Babin v. Commissioner, 23 F.3d 1032, 1034 (6th
Cir. 1994), affg. T.C. Memo. 1992-673.
Accompanying the discharge of indebtedness income rule are
certain exclusions from gross income. Sec. 108(a)(1).
Petitioner has not raised any of the exclusions, and thus the
Court does not consider them.
B. Form 1099
Petitioner claims he did not receive a Form 1099-C from
Citibank discharging the debt. “The moment it becomes clear that
a debt will never have to be paid, such debt must be viewed as
having been discharged.” Cozzi v. Commissioner, 88 T.C. 435, 445
(1987). The nonreceipt of a Form 1099 does not convert a taxable
item to a nontaxable item. Vaughan v. Commissioner, T.C. Memo.
1992-317, affd. without published opinion 15 F.3d 1095 (9th Cir.
1993).
Conclusion
The Court has considered all arguments made by petitioner
and, to the extent they are not addressed herein, concludes they
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are irrelevant or without merit. The Court holds petitioner had
discharge of indebtedness income in the amount of $1,372.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.