T.C. Summary Opinion 2010-128
UNITED STATES TAX COURT
DENNIS W. GAFFNEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13452-09S. Filed August 30, 2010.
Carol Vogt Lavine, for petitioner.
Kimberly L. Clark, for respondent.
HAINES, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
1
Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended. Rule references are to the
Tax Court Rules of Practice and Procedure. Amounts are rounded
to the nearest dollar.
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this opinion shall not be treated as precedent for any other
case.
Respondent determined a deficiency in petitioner’s Federal
income tax for 2006 of $31,179 and a penalty under section
6662(a) of $6,236. After concessions, the remaining issues for
decision are: (1) Whether petitioner is required to include in
income $90,845 of cancellation of indebtedness income for taxable
year 2006 as reported by Bank of America; and (2) whether
petitioner is liable for the accuracy-related penalty under
section 6662(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference. At the time he filed his
petition, petitioner resided in Oregon.
Notice of Deficiency and Procedural Background
Petitioner timely filed a joint income tax return for 2006.
Upon examination of petitioner’s return, respondent determined
that petitioner failed to include $90,845 of cancellation of
indebtedness income as reported for 2006 by Bank of America on
Form 1099-C, Cancellation of Debt, and issued a notice of
deficiency on March 9, 2009. Respondent also determined a
penalty under section 6662(a) of $6,236. On June 3, 2009,
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petitioner filed a petition claiming that the cancellation of
indebtedness income reported on the Form 1099-C was erroneous.
Personal Background
Petitioner was the president of Gaffney Enterprises, Inc.,
an Arizona S corporation that built homes in Hawaii during 1992
and part of 1993. Because of a costly dispute with his company’s
insurer, petitioner and his wife sold most of their assets; and
in August of 1993 they abandoned their personal residence in
Hawaii and moved to an apartment in Carefree, Arizona.
Unbeknownst to petitioner, on March 14, 1994, Bank of
America began proceedings against him in the Circuit Court of the
First Circuit of Hawaii to foreclose the mortgage on the
residence, and, during 1994, the residence was sold at public
sale. On January 17, 1995, without petitioner’s knowledge, Bank
of America obtained a deficiency judgment against petitioner, who
was insolvent, and “charged off” loan No. 3759415 in the name of
Dennis Warren Gaffney for $90,845. In August of 1995 petitioner
moved to Cave Creek, Arizona, where he lived until moving to his
current address in Oregon in March of 1998. While in Arizona,
petitioner continued to receive mail forwarded from his personal
residence in Hawaii. However, petitioner never received notice
of the foreclosure or the deficiency judgment, including service
of process or a copy of the complaint or judgment.
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After charging off loan No. 3759415 on January 17, 1995,
Bank of America intermittently engaged in collection activity on
the judgment. However, Bank of America erroneously focused its
collection efforts in connection with loan No. 3759415 on Thomas
Gaffney. Petitioner has no knowledge of Thomas Gaffney. In Bank
of America’s records, Thomas Gaffney was attributed the same
Social Security number as petitioner and had the same address in
Cave Creek, Arizona, where petitioner previously resided.
According to the collection activity reports Bank of America
provided to respondent, collection activities against Thomas
Gaffney ceased on October 30, 2001. After cessation of
collections, the only other activity that occurred with regard to
loan No. 3759415 was the creation of an asset profile report on
Thomas Gaffney on June 19, 2003.
In 1996 petitioner settled his dispute with his company’s
insurer and negotiated a settlement that included payment of his
outstanding debts. Petitioner neglected to include in the
settlement the judgment by Bank of America, of which he had no
knowledge. Moreover, Bank of America failed to file a claim
against the litigation or settlement proceeds from the insurer,
despite the deficiency judgment obtained a year earlier.
In 2006 Bank of America issued a Form 1099-C to Thomas
Gaffney which reported $90,845 in income from cancellation of
debt for the taxable year 2006 and referenced petitioner’s Social
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Security number. Petitioner never received the Form 1099-C,
which was addressed to Thomas Gaffney at petitioner’s former
address in Cave Creek, Arizona.
In 2008 petitioner was notified by the Internal Revenue
Service that he had failed to include $90,845 of cancellation of
indebtedness income Bank of America reported on a Form 1099-C for
the tax year 2006. Petitioner contacted Bank of America to
determine why the Form 1099-C was issued. In response, Joy
Brinley, an employee of Bank of America, sent petitioner a short
letter on November 4, 2008, simply stating, without further
evidence, that the account had been reviewed and the Form 1099-C
was correct.
Discussion
I. Burden of Proof
As a general rule, the Commissioner’s determinations as set
forth in a notice of deficiency are presumed correct, and the
taxpayer bears the burden of proving that those determinations
are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111
(1933). However, under certain circumstances the burden of proof
may shift to the Commissioner if the taxpayer introduces credible
evidence with respect to any factual issue relevant to
ascertaining the income tax liability of the taxpayer. Sec.
7491(a)(1).
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If an information return, such as a Form 1099-C, serves as
the basis for the determination of a deficiency, section 6201(d)
may apply to shift the burden of production to the Commissioner.
Section 6201(d) provides that in any court proceeding, if a
taxpayer asserts a reasonable dispute with respect to the income
reported on an information return and the taxpayer has fully
cooperated with the Commissioner, then the Commissioner has the
burden of producing reasonable and probative information in
addition to the information return. See McQuatters v.
Commissioner, T.C. Memo. 1998-88.
Petitioner disputes the correctness of the information
return. Petitioner claims that the amount of the discharge of
indebtedness income, if any, reported on the Form 1099-C for 2006
was incorrect and the debt should have been discharged by Bank of
America in some earlier year.
Respondent does not dispute that the burden of production
has shifted to respondent under section 6201(d). Indeed,
respondent acknowledges that petitioner disputed the information
return and cooperated with respondent. Therefore, we hold that
section 6201(d) applies and that the burden is shifted to
respondent to produce reasonable and probative information
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concerning the deficiency in addition to the Form 1099-C Bank of
America filed.2
In support of respondent’s assertion that the discharge of
indebtedness was for the correct amount and occurred in 2006,
respondent provided a letter from Bank of America, which stated
that the account had been reviewed and the Form 1099-C was
correct, along with a collection activity report. The letter
likewise included the amount of the discharge, which petitioner
did not dispute in his petition and did not raise until the end
of the trial. Thus, in the light of the evidence from Bank of
America respondent provided, we find that respondent produced
reasonable and probative information concerning the deficiency,
meeting his burden of production under section 6201(d).3
2
This is generally the rule in the Ninth Circuit, the Court
of Appeals to which this case would be appealable but for sec.
7463(b), under Weimerskirch v. Commissioner, 596 F.2d 358 (9th
Cir. 1979), revg. 67 T.C. 672 (1977), in unreported income cases.
See Lawson v. Commissioner, T.C. Memo. 2009-147 n.3; Rodriguez v.
Commissioner, T.C. Memo. 2009-92 n.2.
3
Whether the reasonable and probative standard of sec.
6201(d) is similar to that of Weimerskirch v. Commissioner, supra
at 362 (the Commissioner must establish a minimum evidentiary
foundation linking the taxpayer with the unreported income), or
of Portillo v. Commissioner 932 F.2d 1128 (5th Cir. 1991) (the
Commissioner may not rely solely upon naked assertions in an
information return that the taxpayer received income), affg. in
part, revg. in part and remanding T.C. Memo. 1990-68, respondent
has met it.
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II. Year of the Discharge of Indebtedness
In general, the term “income” as used in the Internal
Revenue Code means income from any source, including income for
the discharge of indebtedness. Sec. 61(a)(12); Commissioner v.
Glenshaw Glass Co., 348 U.S. 426 (1955); United States v. Kirby
Lumber Co., 284 U.S. 1 (1931). For 2006, Bank of America issued
to petitioner a Form 1099-C which reported discharge of
indebtedness income of $90,845. According to respondent, that
amount is includable in petitioner’s 2006 income.
The moment it becomes clear that a debt will never be
repaid, that debt must be viewed as having been discharged.
Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). Any identifiable
event that fixes the loss with certainty may be taken into
consideration. Id. (citing United States v. S.S. White Dental
Manufacturing Co., 274 U.S. 398 (1927)); cf. sec. 1.6050P-
1(b)(2)(i), (iv), Income Tax Regs. (providing an exclusive list
of eight “identifiable events” under which debt is discharged for
information reporting purposes, including a discharge pursuant to
a foreclosure, the application of a defined policy of the
creditor to discontinue collection activity and discharge the
debt, or the expiration of a nonpayment testing period (usually
36 months)).
The determination of whether discharge of indebtedness has
occurred is fact specific and often turns on the subjective
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intent of the creditor as manifested by an objectively
identifiable event. Cozzi v. Commissioner, supra at 445. The
issuance of a Form 1099-C is an identifiable event, but it is not
dispositive of an intent to cancel indebtedness. Owens v.
Commissioner, T.C. Memo. 2002-253, affd. in part, revd. in part
and remanded 67 Fed. Appx. 253 (5th Cir. 2003). Moreover, a mere
bookkeeping entry by a creditor does not result in discharge of
indebtedness income. See Cozzi v. Commissioner, supra at 445.
Petitioner claims that the discharge of indebtedness income
reported on the Form 1099-C for 2006 should have been reported by
Bank of America in some earlier year. Petitioner’s home was sold
in foreclosure in 1994, and Bank of America “charged off” loan
No. 3759415 in the name of Dennis Warren Gaffney on January 17,
1995. However, Form 1099-C was not sent until 2006 and was
addressed to Thomas Gaffney at petitioner’s former address in
Cave Creek, Arizona, where he had not lived since 1998. In
several cases before this Court in which a mortgage was
foreclosed upon, generating discharge of indebtedness income, the
Form 1099-C was issued in the same year as the foreclosure,
indicating that the foreclosure was the identifiable event
leading to the reporting of income from the discharge of
indebtedness. See, e.g., Jelle v. Commissioner, 116 T.C. 63
(2001); Stoddard v. Commissioner, T.C. Memo. 2002-31; Johnson v.
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Commissioner, T.C. Memo. 1999-162, affd. without published
opinion 211 F.3d 1265 (4th Cir. 2000).
A decision by the creditor or the application of a defined
policy of the creditor to discontinue collection activity and
discharge the debt is an identifiable event that can force
reporting of cancellation of debt income. Sec. 1.6050P-
1(b)(2)(i)(G), Income Tax Regs. From the time of the foreclosure
in 1994 until October 30, 2001, Bank of America intermittently
engaged in collection activity on the judgment, as evidenced by
the collection activity reports Bank of America provided to
respondent. However, the reports show no collection activities,
other than the printing of an asset profile report on Thomas
Gaffney during 2003, have occurred on the account since October
30, 2001. In addition, there is a rebuttable presumption that an
identifiable event has occurred that triggers the reporting of
income from the discharge of indebtedness if a creditor has not
received a payment on a debt at any time during a testing period,
which is usually 36 months. Sec. 1.6050P-1(b)(2)(i)(H), (iv),
Income Tax Regs. Petitioner failed to make a payment on the debt
before the mortgage was foreclosed in 1994. Thus, without
additional evidence of a Bank of America policy to the contrary,
it appears that the identifiable event in connection with the
discharge of indebtedness, if any, occurred well before 2006.
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In support of respondent’s assertion that the discharge of
indebtedness occurred in 2006 and not when the loan was “charged
off” in 1995 or when collection activities ceased in 2001,
respondent provided a letter from Bank of America which stated
that the account had been reviewed and that both the Form 1099-C
and the amount of the discharge of indebtedness income were
correct. Although sufficient to meet respondent’s burden of
production under section 6201(d), the evidence respondent
provided failed to indicate an identifiable event, a bank policy,
or a State law that would justify the discharge of indebtedness
in 2006. We find that petitioner has satisfied his burden of
proving that the discharge occurred before 2006. Therefore, we
hold that petitioner did not have $90,845 of income from the
discharge of indebtedness by Bank of America in 2006.4
III. Section 6662(a) Penalty
Section 6662(a) and (b)(2) imposes a 20-percent accuracy-
related penalty upon any underpayment of tax resulting from a
substantial understatement of income tax. An understatement is
substantial if it exceeds the greater of 10 percent of the tax
required to be shown on the return or $5,000. Sec.
6662(d)(1)(A). The Commissioner bears the burden of production
with respect to penalties. Sec. 7491(c); Higbee v. Commissioner,
4
Petitioner further disputes the amount of the debt on the
Form 1099-C. However, because of our holding herein we find it
unnecessary to address his claim.
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116 T.C. 438, 446-447 (2001). Because of our holding above,
respondent has failed to meet his burden of production with
respect to the penalty. Accordingly, we hold that petitioner is
not liable for the accuracy-related penalty.
The Court, in reaching its holding, has considered all
arguments made, and, to the extent not mentioned, concludes that
they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for petitioner.