T.C. Summary Opinion 2006-119
UNITED STATES TAX COURT
TIMOTHY C. ROBBINS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5187-04S. Filed July 26, 2006.
Timothy C. Robbins, pro se.
Robert S. Scarbrough, 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.
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
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Respondent determined a deficiency of $1,760 in petitioner’s
Federal income tax for the year 2001. The sole issue for
decision is whether petitioner realized discharge of indebtedness
income under section 61(a)(12) and, if so, the extent thereof
under section 108(a).
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are made part hereof.
Petitioner’s legal residence at the time the petition was filed
was Everett, Washington.
Petitioner is a civil litigation attorney in the State of
Washington. From 1985 until 1995, he was a solo practitioner.
In 1995, petitioner hired a recent law graduate, Julie Herber, as
an associate and ultimately divided the practice with her.
During 2001, Ms. Herber owned one-half of the building where
petitioner’s practice is conducted and one-half of his principal
residence. Ms. Herber, along with two other people, also shared
ownership of a cabin with petitioner. Petitioner and Ms. Herber
were married sometime after 2002.
Until 2001, petitioner had a credit card account with MBNA
America Bank N.A. (MBNA). Sometime during 2001 petitioner
defaulted on his credit card payments and allowed the outstanding
balance to exceed his credit limit. As of November 2, 2001, the
unpaid balance on petitioner’s MBNA credit card was $18,240.
Petitioner did not contact MBNA to dispute the amount owing.
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Instead, petitioner negotiated a settlement with MBNA for payment
of the balance. MBNA agreed to accept a payment of $11,856 as
full accord and satisfaction for the $18,240 balance. Petitioner
remitted the $11,856 to MBNA on November 29, 2001.
MBNA thereafter issued petitioner a Form 1099-C,
Cancellation of Debt, for the $6,384 difference between what
petitioner owed on his card and the amount he paid pursuant to
the agreement. Petitioner filed his 2001 Federal income tax
return timely, reporting gross income of $40,431 from wages and
rental income, but he did not include as gross income the $6,384
forgiven by MBNA and reflected on the Form 1099-C.
In the notice of deficiency, respondent determined that the
$6,384 forgiven by MBNA constituted gross income. The principal
issue is whether petitioner is absolved from liability for tax on
this forgiveness of indebtedness because of his claim that he was
insolvent at the time the indebtedness was forgiven.
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 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
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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).
The treatment of discharge of indebtedness income parallels
the Internal Revenue 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, an obligation to repay a
loan is settled for less than the amount of the loan, one
ordinarily 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.
Petitioner does not challenge the principle that discharge
of indebtedness constitutes gross income. His sole argument is
that he was insolvent at the time he 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 amounts that would be includable in
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gross income by reason of the discharge of the indebtedness of
the taxpayer, provided that the taxpayer was insolvent at the
time the indebtedness was discharged.
Petitioner testified extensively about his debts and offered
into evidence a collection statement listing his assets and
liabilities. The Court, however, concludes that petitioner’s
testimony lacks credibility. Petitioner produced no
documentation to support his claims reflected on the collection
statement offered at trial.
Petitioner claimed, both in his collection statement and at
trial, that he was jointly and severally liable for the mortgage
on his business and two residences; however, petitioner owned
these properties jointly with other parties. Although petitioner
may have been jointly and severally liable with other parties for
the indebtedness on these properties, that fact, standing alone
as relates to the issue in this case, does not establish that
petitioner was insolvent without proof that the other codebtors
were themselves insolvent. The Court, therefore, rejects
petitioner’s argument. His financial statement, without
additional corroboration as regards the solvency of his
codebtors, does not satisfy or establish to the Court that he is
insolvent.
Petitioner reported $40,431 in gross income for the year at
issue. Furthermore, petitioner testified that his firm earned
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$144,000 in 2000 and about the same in 2001. He had at least a
50-percent interest in his principal residence and the building
where his firm was located. Additionally, he had at least a 25-
percent interest in a cabin during 2001. Although petitioner had
credit card debt in addition to the balance with MBNA, the
evidence presented does not satisfy the Court that these other
liabilities exceeded the value of his assets. On this record,
the Court holds that petitioner was not insolvent during 2001
and, therefore, must include as gross income the $6,384 discharge
of indebtedness reported by MBNA. Respondent, therefore, is
sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.