T.C. Summary Opinion 2006-87
UNITED STATES TAX COURT
MARCIA ANN COPPERTINO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5034-04S. Filed May 24, 2006.
Richard M. Hoffman, for petitioner.
Stephen A. Haller, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when 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.
Respondent determined a deficiency of $12,356 in
petitioner’s Federal income tax for 2001, an addition to tax
1
Unless otherwise indicated, section references hereafter
are to the Internal Revenue Code in effect for the year at issue.
- 2 -
under section 6651(a)(1), and an accuracy-related penalty under
section 6662(a).
The issues for decision are whether petitioner realized
discharge of indebtedness income under section 61(a)(12) and, if
so, the extent thereof under section 108(a), and whether
petitioner is liable for the section 6662(a) accuracy-related
penalty.2
Some of the facts were stipulated. Those facts and the
accompanying exhibits are so found and are incorporated herein by
reference. Petitioner’s legal residence at the time the petition
was filed was Redondo Beach, California.
For approximately 3 years, including the year at issue,
petitioner was employed as bookkeeper for a company that was
engaged in the promotion and selling of stock or interests in
mining companies. For reasons not established at trial, the
activities of petitioner’s employer ran afoul of the United
States Securities and Exchange Commission (SEC), and, as the
result of a court proceeding, the activity was terminated. Some
of the principals in the activity were charged criminally.
Petitioner was not charged with any criminal activity; however,
she was a defendant in a civil action by the SEC for the actions
of her employer. Based on the claim that petitioner had received
2
At trial, petitioner conceded she is liable for the sec.
6651(a)(1) addition to tax if the Court sustains the deficiency.
- 3 -
moneys from the illegal activity, petitioner was held civilly
liable for $67,820 in what was described by counsel at trial as a
“disgorgement”.3 No portion of the $67,820 has ever been paid,
and, during the year at issue, the SEC formally relieved
petitioner from the obligation of paying this indebtedness. The
SEC issued to petitioner, for the year at issue, 2001, a Form
1099-C, Cancellation of Debt, in the amount of $67,820.45 for
what was described as “Default on payment of penalty,
disgorgement and interest”.
Petitioner filed a Federal income tax return for 2001, which
was received by the Internal Revenue Service on August 22, 2002.
On that return, the only income item reported was a loss of
$3,128 from a Schedule C, Profit or Loss From Business.
Petitioner did not include as income the forgiveness of the
$67,820 debt owing to the SEC.
In the notice of deficiency, respondent determined that the
$67,820.45 debt forgiveness by the SEC constituted gross income.
The principal issue considered at trial is whether petitioner is
absolved from liability for income tax on this forgiveness of
indebtedness because she was insolvent at the time the
indebtedness was forgiven.
Gross income includes all income from whatever source
3
The word “disgorgement” is defined generally as giving up
illicit gains.
- 4 -
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 that is
later discharged or released has realized an accession to income.
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 effects 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., supra).
Petitioner does not challenge the principle that discharge
of indebtedness constitutes gross income. Her sole argument is
that she was insolvent at the time she was relieved of this
liability, and, therefore, the discharged indebtedness does not
constitute gross income. Under section 108(a)(1)(B), gross
income does not include any amount that would be includable in
gross income by reason of the discharge of the indebtedness of
the taxpayer if the taxpayer was insolvent at the time the
indebtedness was discharged.
On her Federal income tax return for 2001, the year at
issue, petitioner reported no wage or salary income or any other
income. She reported a business loss of $3,128 on a Schedule C.
That activity was identified as The All American Herbal Health
Clinic. In the notice of deficiency, respondent made no
- 5 -
adjustments to the income, expenses, or the loss of that activity
as reported by petitioner. Respondent’s sole adjustment in the
notice of deficiency is that petitioner realized gross income
from the cancellation of indebtedness by the SEC. Petitioner
contends she was insolvent and, therefore, did not realize gross
income from cancellation of the debt owing to the SEC.
Section 108(a)(1)(B) provides that the discharge of
indebtedness does not constitute gross income when the taxpayer
is insolvent. Respondent made no determination that petitioner
owned assets or had a net worth. At trial, petitioner’s
testimony was that her only asset consisted of an old automobile.
It appears to the Court that the vehicle had only minimal value,
if any. It was not established that petitioner owned a home or
any property, and she testified she virtually “lived out of her
car”. Given this testimony, counsel for respondent acknowledged,
in response to the Court’s query, that respondent had “no
affirmative knowledge” of any assets owned by petitioner, and
this case was brought to trial “to at least see what she at one
time had and we believe that she could get”. Respondent did not
develop at trial evidence of any assets owned by petitioner. The
Court concludes that petitioner was insolvent and, therefore, is
entitled to relief under section 108(a)(1)(B) by reason of
insolvency. Petitioner, therefore, is sustained on the principal
issue. It follows, therefore, that petitioner is not liable for
- 6 -
the section 6662(a) accuracy-related penalty on underpayment of
tax, since there was no underpayment of tax. Even though
petitioner admitted that her income tax return for 2001 was not
filed timely, she, nonetheless, is not liable for the section
6651(a)(1) addition to tax because the addition to tax is based
on a percentage of the tax “required to be shown on the return”.
Since the Court holds that petitioner had no tax liability, it
follows that petitioner is not liable for the section 6651(a)(1)
addition to tax.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
+ for petitioner.