T.C. Memo. 2008-172
UNITED STATES TAX COURT
RAY JACKSON WINN AND MARGARET G. WINN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19007-06. Filed July 21, 2008.
Ray Jackson Winn and Margaret G. Winn, pro sese.
K. Lyn Hillman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$1,657 in petitioners’ 2004 Federal income tax. The issue for
decision is whether petitioners had unreported cancellation of
debt income for 2004. Unless otherwise indicated, all section
references are to the Internal Revenue Code in effect for the
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year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
FINDINGS OF FACT
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
Texas when they filed their petition.
Ray Jackson Winn (petitioner) had a credit card account with
Providian Bank (credit card). Ray Jackson Winn (petitioner)
incurred and then failed to pay a substantial amount of debt
amassed on the credit card.1 Providian Bank sold petitioner’s
credit card account to Chase Manhattan Bank USA, N.A. (Chase).
Chase sued Ray Jackson Winn (petitioner) in the 216th Judicial
District Court of Bandera County, Texas (district court), because
it could not collect the credit card debt from him. Chase
notified petitioner via certified mail of the motion for summary
judgment that it had filed in the district court.
On August 1, 2003, the district court awarded Chase a
judgment of $27,859.49, plus 7.99 percent interest per annum from
March 29, 2002, to August 1, 2003, $7,167.65 for attorney’s fees,
and postjudgment interest of 10 percent per annum from August 1,
2003, to the date of payment which applied to the entire judgment
1
The record is unclear as to the exact amount of the
credit card debt before it went into collection.
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award including attorney’s fees (the judgment debt). On March
19, 2004, Chase settled with petitioner for $19,021.50 as full
payment for the judgment debt. At the date of settlement, the
face value of the judgment debt totaled approximately $40,000.
Chase reported to the Internal Revenue Service (IRS) that
petitioner had $11,044 of cancellation of debt income for 2004.
Petitioners did not report any cancellation of debt income on
their timely filed 2004 Form 1040, U.S. Individual Income Tax
Return.
Respondent issued a notice of deficiency to petitioners for
2004 determining that the $11,044 reported by Chase as
cancellation of debt income constituted unreported gross income.
OPINION
I. Burden of Proof
Generally, a notice of deficiency is presumed correct, and
the taxpayer bears the burden of proving that the determination
is erroneous. See Welch v. Helvering, 290 U.S. 111, 115 (1933).
The U.S. Court of Appeals for the Fifth Circuit, where an appeal
in this case lies, has recognized, however, that “a court need
not give effect to the presumption of correctness in a case
involving unreported income if the Commissioner cannot present
some predicate evidence supporting its determination.” Portillo
v. Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), affg. in
part, revg. in part and remanding in part T.C. Memo. 1990-68. If
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the presumption of correctness does not apply, the Commissioner’s
determination will be deemed arbitrary, and he will bear the
burden of proving it correct. See also secs. 7491(a), 6201(d).
Petitioners dispute the correctness of the notice of
deficiency and argue that the IRS has not shown how it calculated
the unreported income.
This case is distinguishable from Portillo v. Commissioner,
supra. In Portillo the IRS presented no evidence of the alleged
underreported income other than the difference between Mr.
Portillo’s contractor’s Form 1099 and Mr. Portillo’s tax return.
Here respondent has provided credit card records of the debt,
copies of the district court judgment against petitioner, and
copies of the checks petitioners sent to settle the debt with
Chase. Portillo dealt with a situation where the IRS did not
supply predicate evidence of the unreported income. This is not
such a situation because respondent supplied predicate evidence
supporting the notice of deficiency. Therefore, petitioners
still bear the burden of proof, and the notice of deficiency is
presumed correct.
II. Cancellation of Debt Income
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). The
difference between the face value of the debt and the amount paid
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in satisfaction of the debt is in general includable in the
taxpayer’s gross income. Babin v. Commissioner, 23 F.3d 1032,
1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.
Petitioners do not dispute that they had cancellation of
debt income, only that respondent’s calculation of $11,044 in
cancellation of debt income was arbitrary and incorrect.
However, this argument fails for the reasons set out below.
Petitioners do not dispute that petitioner incurred the
credit card debt. The district court entered the following
judgment:
CHASE MANHATTAN BANK USA, N.A. successor in interest
to, a national banking association, does have and
recover judgment from and against the Defendant, RAY J.
WINN, in the sum and amount of $27,859.49, together
with interest on said indebtedness at the rate of 7.99%
per annum from March 29, 2002 until date of entry of
this Judgment, plus $7,167.65 for Plaintiff’s
reasonable, statutory attorneys’ fees and for all costs
of court in this [sic] behalf expended, with interest
on the entire amount at the rate of 10% per annum from
date of judgment until paid; * * *
On the date of the judgment, without including any interest there
was total judgment debt of at least $35,027.14.2 By March 19,
2004, petitioner’s total judgment debt including interest totaled
approximately $40,000.3 Petitioner settled with Chase on that
2
$27,859.49 plus $7,167.65 (attorney’s fees) equals
$35,027.14, plus costs (which are not listed and are not part of
the record) in total judgment debt on the date the judgment was
entered.
3
During the Tax Court trial Mr. Parsons, Chase’s attorney
(continued...)
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date for $19,021.50 as full satisfaction of that debt. When
$19,021.50 is subtracted from either the approximate amount of
the total judgment debt on March 19, 2004, or the amount as of
the date the judgment was entered, there is at least $11,044 in
cancellation of debt income. Petitioners have not made any
arguments that any of the section 108 cancellation of debt
exceptions applies. Therefore, we hold that respondent’s
determination is correct in that petitioners had at least $11,044
of cancellation of debt income.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we conclude they are irrelevant or without
merit.
To reflect the foregoing,
Decision will be entered
for respondent.
3
(...continued)
in the district court case against petitioner, when asked about
the full amount of petitioner’s debt to Chase on the date of
settlement testified that “The amount of the judgment, I am going
to have to approximate, was $40,000. The settlement that was
offered was 50 percent of the judgment balance.”