T.C. Memo. 2009-239
UNITED STATES TAX COURT
WM. JON & MARY LOU MCCORMICK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14362-08. Filed October 21, 2009.
Wm. Jon McCormick and Mary Lou McCormick, pro sese.
Julia L. Wahl, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a deficiency of $5,067
in petitioners’ Federal income tax for 2005 and an accuracy-
related penalty of $1,007 pursuant to section 6662(a).
Unless otherwise indicated, all section references are to
the Internal Revenue Code for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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After express concessions and abandoned issues, the issue
for decision is whether petitioners must recognize discharge of
indebtedness income as a result of settlement of their accounts
with CitiFinancial Services and Chase Manhattan Bank.
Background
This case was submitted fully stipulated under Rule 122, and
the stipulated facts are incorporated as our findings by this
reference. Petitioners resided in Pennsylvania at the time the
petition was filed. William Jon McCormick (petitioner) is an
attorney.
From at least 2004 petitioners maintained a loan account
with CitiFinancial Services (CitiFinancial). Prior to February
1, 2005, petitioners were advised that the “payoff” amount of the
loan was $8,042.10. In a fax sent February 1, 2005, to a branch
manager, petitioner challenged the payoff amount, claiming that
an insurance refund of $492.44 should have been credited to the
account. The following day, the manager offered to settle the
dispute for a lump-sum payment of $7,500. Petitioner accepted
and paid the $7,500. CitiFinancial sent a Form 1099-C,
Cancellation of Debt, to the Internal Revenue Service.
Before December 2000, petitioner Mary Lou McCormick,
formerly Mary Lou Howard, had a credit card with Chase Manhattan
Bank (Chase). The account was placed with collection agencies
January 4, 2001, and October 10, 2001. Petitioners disputed the
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account from at least February 2002. On May 12, 2005, petitioner
sent a letter to Chase challenging the alleged account balance of
$2,875 and noting that the period of limitations on a suit to
collect had expired. Petitioner offered to pay $1,000 as the
amount “actually owed”. Chase accepted and mailed petitioner
Mary Lou McCormick a 2005 Form 1099-C for $1,875, the difference
between the balance on the account and the payment.
Discussion
The issue remaining for decision is whether petitioners had
cancellation of indebtedness income from CitiFinancial and Chase.
Section 61(a)(12) includes in the general definition of
gross income “income from discharge of indebtedness”. When the
amount of a debt is disputed, “a subsequent settlement of the
dispute would be treated as the amount of debt cognizable for tax
purposes.” Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir.
1990) (holding that unenforceable debt is also disputed as to
amount, and its settlement does not give rise to cancellation of
indebtedness income) revg. 92 T.C. 1084 (1989); N. Sobel, Inc. v.
Commissioner, 40 B.T.A. 1263, 1265 (1939). There must be
evidence of a dispute; a settlement standing alone does not prove
that a good-faith dispute existed. See Rood v. Commissioner,
T.C. Memo. 1996-248, affd. without published opinion 122 F.3d
1078 (11th Cir. 1997).
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In a fax sent to CitiFinancial petitioner argued that the
loan payoff amount of $8,042.10 should be reduced by a $492.44
insurance refund. Aside from the insurance refund, petitioners
do not argue that the payoff amount was incorrect.
In a letter sent to Chase petitioner argued that the
outstanding balance should be $1,000 rather than the $2,875
claimed by the bank. Bank records reflected that the account had
been disputed from at least 2002.
The preponderance of the evidence supports a conclusion that
a bona fide dispute existed regarding the $492.44 insurance
refund on the CitiFinancial debt and the balance of the Chase
account over $1,000. See, e.g., Earnshaw v. Commissioner, T.C.
Memo. 2002-191, affd. 150 Fed. Appx. 745 (10th Cir. 2005); see
also Melvin v. Commissioner, T.C. Memo. 2009-199.
To determine the amount of cancellation of indebtedness
income properly attributed to petitioners, we must determine the
amount of the CitiFinancial and Chase debt that was definite and
liquidated. See Zarin v. Commissioner, supra at 116.
In this case, respondent may not rely on the Forms 1099-C
submitted by CitiFinancial and Chase as evidence of the amount of
debt that was definite and liquidated. 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 and has fully cooperated, the Commissioner
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shall have the burden of producing reasonable and probative
information concerning the deficiency in addition to the
information return. Petitioners have asserted reasonable
disputes with respect to the amounts reported by CitiFinancial
and Chase. Respondent has failed to produce reasonable and
probative information independent of the third-party information
returns.
Petitioners did not dispute the CitiFinancial claimed payoff
amount of $8,042.10, less the disputed insurance refund of
$492.44, a total of $7,549.66. That amount is decreased by the
settlement payment of $7,500. We conclude that the amount of
petitioners’ cancellation of indebtedness income from
CitiFinancial is $49.66.
Petitioners had an uncontested and liquidated outstanding
balance of $1,000 with Chase. Because they paid $1,000 to settle
the account, they have no cancellation of indebtedness income
from Chase.
In reaching our decision, we have considered all arguments
made by the parties. To the extent not mentioned or addressed,
they are irrelevant or without merit.
For the reasons explained above,
Decision will be entered
under Rule 155.