T.C. Summary Opinion 2006-16
UNITED STATES TAX COURT
MILLARD J. AND JACQUIE M. SCOTT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8110-04S. Filed January 30, 2006.
Millard J. and Jacquie M. Scott, pro sese.
Charles J. Graves, for respondent.
GOLDBERG, 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, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
- 2 -
Respondent determined a deficiency in petitioners’ Federal
income tax of $865 for the taxable year 2001.
The issue for decision is whether petitioners received
discharge of indebtedness income of $6,583 in taxable year 2001,
which they failed to report. We hold that they did.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioners resided in
Eagar, Arizona, on the date the petition was filed in this case.
From March 2000 through November 2001, petitioners had three
joint credit cards issued to them by MBNA America Bank N.A.
(MBNA). A statement of accounts with a closing date of July 12,
2001, showed the balance due MBNA on these accounts consisting of
credit card charges, balance transfers, checks, interest,
operation charges, and penalties totaled $20,645.39. Petitioners
secured a loan from a bank, not identified in the record, to pay
off their credit card debt, in an attempt to consolidate their
liabilities. Petitioners, on August 21, 2001, made a payment of
$14,937.26 to MBNA for settlement of their accounts. MBNA
received said payment of $14,937.26 on August 21, 2001. As a
result of this settlement transaction, MBNA issued a Form 1099-C,
Cancellation of Debt, to petitioners for taxable year 2001.
Also, MBNA filed with respondent a Form 1099-C with respect to
- 3 -
petitioners. The Form 1099-C reported August 28, 2001, as the
date of the cancellation of debt and $6,583.34 as the amount of
debt canceled.
Petitioners were not insolvent in 2001, nor did they file
for bankruptcy during that year.
Petitioners timely filed their Form 1040, U.S. Individual
Income Tax Return, for the taxable year 2001. Petitioners did
not report any part of the cancellation of indebtedness on their
2001 tax return.
Subsequently, respondent determined that petitioners failed
to report on their tax return for 2001 income from discharge of
indebtedness of $6,583. Accordingly, respondent issued to
petitioners a notice of deficiency determining a deficiency of
$865 in petitioners’ 2001 Federal income tax.
Discussion
As a general rule, the determinations of the Commissioner in
a notice of deficiency are presumed correct, and the taxpayer
bears the burden of proving the Commissioner’s determinations in
the notice of deficiency to be in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). As one exception to this
rule, section 7491(a) places upon the Commissioner the burden of
proof with respect to any factual issue relating to liability for
tax if the taxpayer maintained adequate records, satisfied the
substantiation requirements, cooperated with the Commissioner,
- 4 -
and introduced during the Court proceeding credible evidence with
respect to the factual issue. Although neither party alleges the
applicability of section 7491(a), we conclude that the burden of
proof has not shifted with respect to the issue in the present
case.
Section 61(a) defines gross income as “all income from
whatever source derived,” unless otherwise provided. The Supreme
Court has consistently given this definition of gross income a
liberal construction “in recognition of the intention of Congress
to tax all gains except those specifically exempted.”
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955); see
also Roemer v. Commissioner, 716 F.2d 693, 696 (9th Cir. 1983)
(all realized accessions to wealth are presumed taxable income,
unless the taxpayer can demonstrate that an acquisition is
specifically exempted from taxation), revg. 79 T.C. 398 (1982).
It is beyond dispute that “Income from discharge of
indebtedness” is included within the broad definition of income.
Sec. 61(a)(12); sec. 1.61-12(a), Income Tax Regs. “The
underlying rationale for such inclusion is that to the extent a
taxpayer is released from indebtedness, he or she realizes an
accession to income due to the freeing of assets previously
offset by the liability.” Jelle v. Commissioner, 116 T.C. 63, 67
(2001) (citing United States v. Kirby Lumber Co., 284 U.S. 1, 3
(1931)).
- 5 -
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 that the debtor must include
in income. Sec. 61(a)(12).
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). However, these exceptions do not apply to the
present case.
Petitioners state that the instructions in the Internal
Revenue Service (IRS) guidance booklet for filing a 1099-C
require that only the principal of a lending transaction be taken
into income as discharge of indebtedness income. Consequently,
petitioners argue that their outstanding credit card liability,
which included interest, operation charges, and penalties, should
be reduced pursuant to the instructions in the IRS guidance
booklet. The instructions on which petitioners rely are found in
the “2001 Instructions for Forms 1099-A and 1099-C”. The
pertinent instructions state, as follows:
- 6 -
Debt Defined
A debt is any amount owed to you including stated principal,
stated interest, fees, penalties, administrative costs, and
fines. The amount of debt canceled may be all or only part
of the total amount owed. However, for a lending
transaction, you are required to report only the stated
principal. See Exceptions on page AC-3.
* * * * * * *
Exceptions
* * * * * * *
2. Interest. You are not required to report interest.
However, if you choose to report interest as part of the
canceled debt in box 2 [of the 1099-C], you must show the
interest separately in box 3.
3. Nonprincipal amounts. For a lending transaction,
you are not required to report any amount other than stated
principal. A lending transaction occurs when a lender loans
money to, or makes advances on behalf of, a borrower
(including revolving credit and lines of credit).
Nonprincipal amounts include penalties, fines, fees, and
administrative costs. However, for a nonlending
transaction, report any of these amounts that are included
in the debt.
This guidance is provided by the IRS to assist parties in
preparing a Form 1099-C.
First, the authoritative sources of Federal tax law are in
the statutes, regulations, and judicial decisions, and not in
informal publications provided by the IRS. Zimmerman v.
Commissioner, 71 T.C. 367, 371 (1978), affd. without published
opinion 614 F.2d 1294 (2d Cir. 1979). Second, petitioners have
not shown the total amount of interest, operation charges, and
penalties that they claim should reduce their outstanding credit
- 7 -
card liability. Third, pursuant to the above-referenced
instructions, in a nonlending transaction, such as occurred here,
any nonprincipal amounts are included in the debt. Thus, it
appears that petitioners are incorrectly interpreting the above-
referenced instructions or are incorrectly categorizing their
transaction as a lending transaction.
Further, applicable case law establishes that in situations
where the facts and circumstances are such that indebtedness from
a credit card account is being discharged, the amount of income
as a result of the discharge of this indebtedness is an amount
equal to the difference between the amount due on the obligation
and the amount paid for the discharge, or 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. See Earnshaw v. Commissioner, T.C. Memo. 2002-191, affd.
150 Fed. Appx. 745 (10th Cir. 2005). Accordingly, we conclude
that petitioners received discharge of indebtedness income of
$6,583.
Petitioners alternatively argue that the amount of $6,583
was a reduction of charges agreed to by MBNA in exchange for
petitioners’ prompt payment of $14,937.26. In other words,
petitioners argue that they contested the amount of the debt with
MBNA and that through negotiations it was established that
$14,937.26 was the total amount of petitioners’ credit card debt.
- 8 -
Nothing in the record indicates that petitioners contested the
amount of the credit card debt with MBNA. In fact, MBNA’s action
of issuing a Form 1099-C is contrary to petitioners’ contention.
Further, petitioners have not offered any documentary evidence
supporting their claims that they contested the amount of the
debt with MBNA and that through negotiations it was established
that $14,937.26 was the total amount of petitioners’ credit card
debt. It is well settled that we are not required to accept
self-serving testimony in the absence of corroborating evidence.
Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989),
affg. T.C. Memo. 1987-295; Niedringhaus v. Commissioner, 99 T.C.
202, 212 (1992). On the basis of the record in the present case,
we find that the amount of $6,583 was not a reduction of charges
but was, in fact, a discharge of indebtedness.
We have considered all of the other arguments made by
petitioners, and, to the extent that we have not specifically
addressed them, we conclude they are without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.