T.C. Summary Opinion 2011-73
UNITED STATES TAX COURT
THOMAS F. AND WENDY LIOTTI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10194-08S. Filed June 20, 2011.
Thomas F. Liotti, for petitioners.
Monica E. Koch, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined a deficiency of $3,892 in petitioners’
Federal income tax for 2005. The issue for decision is whether
petitioners are liable for unreported discharge of indebtedness
(DOI) income.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference.1 Petitioners resided in New
York when they filed their petition.
During the year in issue Thomas F. Liotti (petitioner) was
an attorney in New York. At the time of trial petitioner was
admitted to practice before this Court. He had held a credit
card account with MBNA America Bank N.A. (MBNA) since 1985.
Petitioner’s account was sponsored by the New York State Bar
Association; his name was the only name on the account. At the
time of trial petitioner had not used the account for several
years. Over the course of 2004 and 2005 petitioner sent letters
to MBNA in which he discussed the amount he felt he rightfully
1
Petitioner Wendy Liotti did not sign the stipulation of
facts, nor did she appear at trial. Petitioner Thomas F. Liotti
stated that he represented himself and his wife and that she was
listed as a petitioner solely because the couple filed a joint
Federal income tax return for the year in issue. This case is
considered submitted on the part of both petitioners. See Rule
149(a).
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owed. There are no responses from MBNA to petitioner’s letters
in the record. At some point in 2005 petitioner and MBNA agreed
that petitioner would pay $5,200 to settle his account.
Petitioner made the final payment toward the settlement in July
2005. Petitioner’s credit card statement with a closing date of
September 21, 2005, reflects a finance charge adjustment of
$244.47 and a “charge off” of $11,974.65. MBNA provided the
Internal Revenue Service a Form 1099-C, Cancellation of Debt,
which reflected a cancellation of petitioner’s debt of $11,974.65
for 2005. Petitioner denied that he received a Form 1099-C from
MBNA for 2005.
Petitioners did not include the $11,974.65 as income on
their 2005 joint Federal income tax return. Respondent sent
petitioners a notice of deficiency that included the $11,974.65
in petitioners’ income for 2005 and determined a deficiency of
$3,892.2 After the notice was issued, petitioner paid the tax
and interest shown due on the notice.3
2
Other changes determined in the notice of deficiency were
computational and will not be discussed.
3
The payment of tax after the mailing of a notice of
deficiency shall not deprive the Court of jurisdiction over such
deficiency. See sec. 6213(b)(4); Hazel v. Commissioner, T.C.
Memo. 2008-134. The Court also has jurisdiction to determine an
overpayment in a deficiency proceeding. See sec. 6512(b)(1).
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Discussion
I. Burden of Proof and Production
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a); see INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. 111, 115 (1933). The burden of proof for factual matters
may be shifted to the Commissioner under section 7491.
Petitioner has not alleged that section 7491 applies.
If an information return, such as a Form 1099-C, is the
basis for the Commissioner’s determination of a deficiency,
section 6201(d) may apply to shift the burden of production to
the Commissioner if in any court proceeding the taxpayer asserts
a reasonable dispute with respect to the income reported on the
information return and the taxpayer has fully cooperated with the
Commissioner. See McQuatters v. Commissioner, T.C. Memo. 1998-
88. As discussed infra, petitioner has failed to assert a
reasonable dispute with respect to the income reported on the
Form 1099-C.
Thus there is no burden shift under either section 7491 or
6201(d).
II. DOI Income
Gross income includes all income from whatever source
derived. Sec. 61(a). DOI is specifically included as an item of
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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. Id.; United States
v. Kirby Lumber Co., 284 U.S. 1, 3 (1931). The rationale of this
principle is that the discharge of a debt for less than its face
value accords the debtor an economic benefit equivalent to
income. United States v. Kirby Lumber Co., supra at 3; Friedman
v. Commissioner, 216 F.3d 537, 545 (6th Cir. 2000), affg. T.C.
Memo. 1998-196. Accordingly, when a taxpayer’s obligation to
repay a debt is settled for less than the face value of the debt,
he ordinarily realizes DOI income. Sec. 61(a)(12); see 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). Accrued interest
that is discharged through a settlement is considered DOI income.
Payne v. Commissioner, T.C. Memo. 2008-66, affd. 357 Fed. Appx.
734 (8th Cir. 2009); see sec. 1.6050P-1(c), Income Tax Regs.
Accompanying the DOI rule are certain exclusions from gross
income. Sec. 108(a)(1). Petitioner does not argue that any of
the exclusions apply; thus the Court does not consider them.
Petitioner contends that he did not have DOI income on the
basis that: (1) The amount he owed MBNA was in dispute (a
contested liability); (2) the amount of interest MBNA was
charging him was usurious; and (3) he did not receive a Form
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1099-C from MBNA and did not know that there would be any tax
ramifications for settling his account for less than the full
amount of his MBNA account balance.
One exception to the general DOI rule is the “contested
liability” doctrine, under which DOI income will be disregarded
when computing gross income if the taxpayer disputes the original
amount of a debt in good faith and the debt is subsequently
settled. Preslar v. Commissioner, 167 F.3d 1323, 1327 (10th Cir.
1999) (citing Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir.
1990)), revg. T.C. Memo. 1996-543. A taxpayer’s good faith
challenge to the enforceability of a debt does not necessarily
shield him from DOI income when the dispute is resolved. Preslar
v. Commissioner, supra at 1328; see also Rood v. Commissioner,
T.C. Memo. 1996-248, affd. without published opinion 122 F.3d
1078 (11th Cir. 1997). “To implicate the contested liability
doctrine, the original amount of the debt must be unliquidated.
A total denial of liability is not a dispute touching upon the
amount of the underlying debt.” Preslar v. Commissioner, supra
at 1328. Additionally, the fact that a settlement is for less
than the full amount of a taxpayer’s debt is insufficient to
establish that the debt was disputed. Melvin v. Commissioner,
T.C. Memo. 2009-199 (citing, e.g., Rood v. Commissioner, supra).
Petitioner has not shown a challenge to the original amount of
the underlying debt.
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Petitioner entered into evidence several letters that he
wrote to MBNA in which he argues that he does not owe the amount
listed as the balance of his account. Petitioner believed that
he had paid more in interest than the underlying principal
balance of the account because he had not used the account for a
number of years.4 In a letter dated November 30, 2004,
petitioner contends that he has paid more than $16,000 “on the
underlying obligation”. (Emphasis added.) In the same letter he
also contends that he does not owe MBNA $16,387.78. In a letter
dated January 18, 2005, petitioner writes that his account
balance as of December 19, 1998, was $25,168.88. He then
contends that between December 19, 1998, and December 20, 2002,
he had paid MBNA $26,606 and had made additional payments since
2002. Petitioner also documents the rise in the interest rate of
his account in the January 18, 2005, letter. In a letter dated
March 8, 2005, petitioner writes that he has paid MBNA a total of
$34,451 but that he is not certain how much of that amount was
penalties and interest as opposed to principal.
Petitioner’s contention that the debt is contested is
incorrect. Petitioner has made no argument against the original
amount of his debt. See Preslar v. Commissioner, supra at 1327.
Through petitioner’s letters to MBNA it is clear that his
4
Petitioner cited both 1998 and 2001 as the last year that
the account had been used.
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argument is with the amount of interest he is being charged, not
the underlying debt. Petitioner admits to making payments on the
underlying obligation in his letters and never argues that he did
not incur the charges on the account or that he did not owe the
principal balance of the account. The interest charged to
petitioner’s account is part of his debt obligation. See Payne
v. Commissioner, supra. Interest is included in the definition
of indebtedness. Sec. 1.6050P-1(c), Income Tax Regs.; cf. Payne
v. Commissioner, supra. Petitioner’s challenge to the amount of
interest he is charged does not rise to a contested liability.
Coupled with, and seemingly a second prong of, petitioner’s
contested liability argument is his argument that the interest
MBNA charged was usurious under New York law and the discharge of
such interest should, therefore, not be income to him.
Petitioner testified and mentioned in more than one letter
admitted into evidence that the usury rate of interest in New
York was 25 percent.5 All of the credit card statements that
petitioner entered into evidence reflect an annual interest rate
of 22.98 percent. While this interest rate is high, it does not
5
Petitioner has taken on the mantle of protecting all
consumers from the aggressive tactics of the credit card
companies and even informed the Court that he was “here, Judge,
for the American people, as well as for myself.”
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reach the level of what petitioner claims is usurious in New
York.6
Petitioner also argues that he never received a Form 1099-C
from MBNA and did not know that there would be any tax
ramifications for settling his debt for less than the full
amount. “The moment it becomes clear that a debt will never have
to be paid, such debt must be viewed as having been discharged.”
Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). The nonreceipt
of a Form 1099 does not convert a taxable item into a nontaxable
item. Vaughn v. Commissioner, T.C. Memo. 1992-317, affd. without
published opinion 15 F.3d 1095 (9th Cir. 1993). Any identifiable
event that fixes the loss with certainty may be taken into
consideration. Cozzi v. Commissioner, supra at 445 (citing
United States v. S.S. White Dental Manufacturing Co., 274 U.S.
398 (1927)); cf. sec. 1.6050P-1(b)(2)(i)(F), Income Tax Regs.
(listing a discharge of indebtedness pursuant to an agreement
between an applicable entity and a debtor to discharge
indebtedness at less than full consideration as one of the eight
exclusive “identifiable events” under which debt is discharged
for information reporting purposes).
6
Even if petitioner had made a “good faith” challenge to the
interest rate, that alone would not “shield” him from DOI income.
See Preslar v. Commissioner, 167 F.3d 1323, 1328 (10th Cir.
1999), revg. T.C. Memo. 1996-543. Petitioner does not know how
much of his account balance was interest as opposed to principal.
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Petitioner is an attorney and a member of the Tax Court bar
with legal acumen and a fundamental knowledge of legal research.
The fact that petitioner did not know that there were tax
ramifications associated with settling a debt for less than its
face value does not negate his enjoyment of the economic benefit
from the discharge of his debt. See sec. 61(a)(12); United
States v. Kirby Lumber Co., 284 U.S. 1 (1931).
Conclusion
Petitioner has failed to prove that there was a contested
liability concerning his MBNA account. Petitioner’s failed
usurious interest argument, his lack of receipt of a Form 1099-C,
and his lack of knowledge of DOI income tax ramifications do not
negate the fact that he received a discharge of debt that
resulted in income. Therefore, the $11,974.65 of petitioner’s
MBNA account balance that was discharged is income to petitioners
and should have been included on their 2005 joint Federal income
tax return.
We have considered petitioner’s arguments, and, to the
extent not mentioned, we conclude the arguments to be moot,
irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.