T.C. Memo. 2009-101
UNITED STATES TAX COURT
LAWRENCE EVERETTE HILL AND JESSIE HILL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12118-07. Filed May 18, 2009.
Lawrence Everette Hill and Jessie Hill, pro se.
Noelle C. White, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined a deficiency of $456 in
petitioners’1 2004 Federal income tax. The issue for decision is
whether petitioner must recognize cancellation of indebtedness
1
Ms. Hill is a party to this action because she filed a
joint return for the year at issue with Mr. Hill. References to
petitioner are to Mr. Hill.
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(COI) income under section 61(a)(12)2 of $4,156. For the reasons
stated herein, we find that petitioner must recognize the COI
income.
FINDINGS OF FACT
Petitioner resided in Maryland at the time of filing the
petition.
On December 4, 1987, petitioner applied for and received a
credit card from Provident Bank (Provident). Petitioner used the
credit card but did not make the required payments. On March 27,
1991, Provident obtained a judgment of $1,840 plus interest
against petitioner in Maryland State court.
Petitioner filed for bankruptcy shortly thereafter. On
October 28, 1991, the U.S. Bankruptcy Court for the District of
Maryland issued an order confirming petitioner’s installment
plan. The installment plan required petitioner to make payments
of $175 a month for 60 months. Petitioner did not make the
required payments, and on July 22, 1996, an order was issued
dismissing petitioner’s bankruptcy case for material default.
Provident maintained records of petitioner’s debt and sent
annual letters informing petitioner of his account balance. In
2004 Provident forgave petitioner’s debt. Provident issued a
Form 1099-C, Cancellation of Debt, to petitioner which reported
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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$4,156 in income due to cancellation of debt in 2004. Petitioner
filed a joint Form 1040, U.S. Individual Income Tax Return, for
2004 but did not include the $4,156 in gross income.
On February 20, 2007, respondent issued a notice of
deficiency (the notice) to petitioner for 2004. Respondent
determined in the notice that petitioner was required to include
$13 of dividend income and $4,156 of COI in gross income. On May
29, 2007, petitioner timely petitioned this Court for a
redetermination of his tax liability. Petitioner concedes the
receipt of $13 of dividend income that was not included in gross
income.
OPINION
In general, the Commissioner’s determination as set forth in
a notice of deficiency is presumed correct, and the burden of
proof is on the taxpayer to prove otherwise. Rule 142(a)(1);
Welch v. Helvering, 290 U.S. 111, 115 (1933). However, under
certain circumstances the burden shifts where a taxpayer
introduces credible evidence with respect to any factual issue
relevant to ascertaining the income tax liability of the
taxpayer. Sec. 7491(a)(1). Petitioner does not claim that the
burden of proof shifts to respondent under section 7491(a). In
any event, petitioner has failed to establish that he has
satisfied the requirements of section 7491(a)(1) and (2).
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Accordingly, the burden of proof does not shift to respondent
under section 7491(a).
Section 6201(d) provides that in any court proceeding, if a
taxpayer asserts a reasonable dispute with respect to any item of
income reported on an information return such as a Form 1099
filed by a third party and the taxpayer has fully cooperated with
the Internal Revenue Service, the Commissioner has the burden of
producing reasonable and probative information concerning the
deficiency in addition to information on the return itself.
Petitioner disputes the information on the Form 1099-C
Provident issued and argues that his debt was discharged in
bankruptcy. However, the record shows that petitioner’s
bankruptcy case was dismissed because he did not meet the
obligations of the bankruptcy plan. Petitioner has not asserted
a reasonable dispute with respect to the COI income on the Form
1099-C. Accordingly, section 6201(d) does not shift the burden
to respondent.
Generally, a taxpayer must include income from the discharge
of indebtedness. Sec. 61(a)(12); sec. 1.61-12(a), Income Tax
Regs. Caselaw indicates that where indebtedness from a credit
card account is being discharged, the amount of income as a
result of the discharge equals 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
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amount of the debt is considered the amount of income that the
debtor must include in income. See, e.g., Cronin v.
Commissioner, T.C. Memo. 1999-22.
There are exceptions to this general rule. Section 108(a)
provides in relevant part that a taxpayer may exclude income from
the discharge of indebtedness if the discharge occurs in a
bankruptcy case or when the taxpayer is insolvent.
Petitioner has not shown that he qualifies for any of the
exceptions in section 108(a). Petitioner does not dispute the
amount of his debt to Provident or the amount of interest accrued
thereon, only that it was dealt with in his bankruptcy case. As
discussed above, petitioner’s debt to Provident was not
discharged in bankruptcy. Petitioner defaulted on his payment
plan, his bankruptcy case was dismissed, and his original debts
were restored.
Section 108(a)(1)(B) provides that gross income does not
include any amount which would be includable in income because of
the discharge of indebtedness if the discharge occurs when the
taxpayer is insolvent. Section 108(d)(3) provides that a
taxpayer is insolvent if his liabilities exceed the fair market
value of his assets. See Tabrezi v. Commissioner, T.C. Memo.
2006-61; Bressi v. Commissioner, T.C. Memo. 1991-651, affd.
without published opinion 989 F.2d 486 (3d Cir. 1993).
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Petitioner has not shown that he was insolvent in 2004 when
Provident forgave his debt. Petitioner did not produce any
evidence showing that his liabilities exceeded the fair market
value of his assets and has failed to meet his burden of proving
his insolvency at the time his debt was forgiven.
Because Provident forgave petitioner’s debt and because
petitioner has not shown that he qualifies for any of the
exceptions in section 108(a), petitioner is required to include
the COI income in gross income.
Accordingly,
Decision will be entered
for respondent.