T.C. Memo. 2011-233
UNITED STATES TAX COURT
THOMAS AND MONICA L. KLEBER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1545-09. Filed September 28, 2011.
David R. Emerich, for petitioner.
Christina E. Ciu for respondent.
MEMORANDUM OPINION
HAINES, Judge: Respondent determined a deficiency in
petitioners’ Federal income tax for 2006 of $86,441 and a penalty
under section 6662(a) of $17,288.1 The issues for decision are:
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. Amounts are rounded to the nearest dollar.
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(1) Whether petitioners are required to include in income
$263,587 of cancellation of indebtedness income (COI income) for
taxable year 2006 as reported by the Defense Finance and
Accounting Services (DFAS); (2) if so, whether the $263,587 of
COI income reported is the correct amount; and (3) whether
petitioners are liable for the accuracy-related penalty under
section 6662(a).
Background
The parties submitted this case fully stipulated pursuant to
Rule 122. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time they filed
their petition, petitioners lived in Arizona.
On October 7, 1996, petitioner Monica Kleber (Kleber)
executed a lease (lease) for agricultural purposes with the
Department of the Navy (Navy). The lease term was from January
1, 1997, to December 31, 2001, and entitled Kleber to 1,140 acres
of land at the Naval Air Station in Lemoore, California. The
lease required Kleber to pay the Navy annual rent of $191,520,
payable in advance at the rate of $47,880 every quarter, and to
perform certain farming activities in accordance with prescribed
guidelines.
Kleber failed to make any rent payments after August 4,
1998. On December 28, 1998, Kleber sent a letter to the Navy
stating that she was no longer able to continue performing the
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farming activities pursuant to the terms of the lease. On
January 11, 1999, the Navy sent Kleber a letter acknowledging
receipt of her letter and confirming the Navy’s intention to
terminate the lease for default. Additionally, this letter
demanded that Kleber pay past due rent of $196,020 plus $2,736 of
interest accrued. On February 2, 1999, the Navy sent Kleber a
modified contract changing the expiration date of the lease term
to January 11, 1999. The Navy determined past due rent on the
basis of an accounting from the lease start date to its
termination on January 11, 1999.
On February 4, 1999, the Navy sent Kleber a letter providing
formal notification of her continued violation of the lease and
demanding full payment of all past due rent and interest. On
February 26, 1999, the Navy sent Kleber another letter, demanding
payment on the unpaid rent and interest. Petitioners did not
make any payments on the amounts due.
On February 26, 1999, the Navy sent a letter to the Defense
Finance and Accounting Service (DFAS), requesting DFAS’
assistance in collection of amounts due with respect to the
lease. On April 6, 1999, DFAS sent Kleber a letter demanding
payment of past due rent of $196,020, interest of $6,798, and a
one-time administrative charge of $25.
On September 4, 2001, DFAS referred the collection action to
the Treasury Cross-Service Program (Treasury). Treasury referred
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the debt back to DFAS as uncollectible on September 30, 2004. As
a result, on November 4, 2005, DFAS sent a letter to Treasury
requesting approval to terminate the debt collection action. On
November 22, 2005, DFAS authorized a writeoff of Kleber’s debt.
In 2006 DFAS issued Kleber a Form 1099-C, Cancellation of Debt,
including COI income of $263,587.
Petitioners timely filed a joint income tax return for 2006.
Upon examination of petitioners’ return, respondent determined
that petitioners had failed to include $263,587 of COI income for
taxable year 2006 as reported by DFAS on Form 1099-C and issued a
notice of deficiency on October 14, 2008. Respondent also
determined a penalty under section 6662(a) of $17,288. On
January 7, 2009, petitioners mailed their petition to this Court.
Discussion
I. Burden of Proof
As a general rule, the Commissioner’s determinations 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.
Petitioners dispute the correctness of Form 1099-C, and
there is no evidence that they failed to cooperate with
respondent. Petitioners claim that the amount of COI income for
2006, if there was any, was incorrect and the debt should have
been discharged by DFAS in some earlier year. Therefore, we hold
that section 6201(d) applies and that the burden is shifted to
respondent to produce reasonable and probative information
concerning the deficiency in addition to the Form 1099-C DFAS
filed.2
To prove that the COI income was properly and accurately
reported for 2006, respondent provided the lease agreement, the
2
This is generally the rule in unreported income cases in
the Ninth Circuit, where this case is appealable, under
Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg.
67 T.C. 672 (1977). See Lawson v. Commissioner, T.C. Memo. 2009-
147 n.3; Rodriguez v. Commissioner, T.C. Memo. 2009-92 n.2.
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Navy’s accounting of rent due and paid, a letter from Kleber
informing the Navy of her inability to pay the rent due pursuant
to the lease, and a series of letters from the Navy and DFAS to
Kleber concerning the indebtedness. The letters sent to Kleber
include the amount of indebtedness and provide a timeline of the
Navy’s and DFAS’ collection procedures, culminating in the
issuance of a Form 1099-C in 2006. Thus, we find that respondent
produced reasonable and probative information concerning the
deficiency, meeting his burden of production under section
6201(d).
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 from
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 DFAS issued petitioners
a Form 1099-C which reported COI income of $263,587. According
to respondent, that amount is includable in petitioners’ 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). The
determination of whether discharge of indebtedness has occurred
is fact specific and often turns on the subjective intent of the
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creditor as manifested by an objectively identifiable event. Id.
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.
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). There is a rebuttable presumption that an identifiable
event has occurred during a calendar year if a creditor has not
received a payment on an indebtedness at any time during a
testing period ending at the close of the year. Sec. 1.6050P-
1(b)(2)(iv), Income Tax Regs. The testing period is a 36-month
period increased by the number of calendar months during all or
part of which the creditor was precluded from engaging in
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collection activity by a stay in bankruptcy or similar bar under
State or local law. Id.
The presumption that an identifiable event has occurred may
be rebutted by the creditor if the creditor (or a third-party
collection agency on behalf of the creditor) has engaged in
significant, bona fide collection activity at any time during the
12-month period ending at the close of the calendar year, or if
facts and circumstances existing as of January 31 of the calendar
year following expiration of the 36-month period indicate that
the indebtedness has not been discharged. Id. Significant, bona
fide collection activity does not include nominal or ministerial
collection action, such as automated mailing. Sec. 1.6050P-
1(b)(2)(iv)(A), Income Tax Regs. Facts and circumstances
indicating that indebtedness has not been discharged include the
existence of a lien, or the sale or packaging for sale of the
indebtedness by the creditor. Sec. 1.6050P-1(b)(2)(iv)(B),
Income Tax Regs.
Kleber failed to make any rent payments after August 4,
1998. On January 11, 1999, the Navy sent Kleber a letter
confirming the Navy’s intention to terminate the lease for
default and demanding that Kleber pay past due rent of $196,020
plus $2,736 of interest accrued. On April 6, 1999, DFAS sent
Kleber a letter demanding payment of past due rent of $196,020,
interest of $6,798, and a one-time administrative charge of $25.
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Accordingly, the 36-month testing window described by the
regulations began in 1999 when the Navy and DFAS demanded payment
of past due rent and interest. Because petitioners have failed
to make any payments on the amounts due, a rebuttable presumption
exists that an identifiable event occurred in 2002 and the COI
income must be recognized for 2002.
As discussed above, in support of respondent’s assertion
that petitioners had COI income for 2006, respondent provided a
series of letters from the Navy and DFAS to Kleber stating the
amount of indebtedness, a description of the Navy’s and DFAS’
alleged collection activity, and DFAS’ letter authorizing the
termination of the debt collection action. More specifically,
respondent relies on the summary of events attached to DFAS’
letter to Treasury on November 4, 2005, which indicates that DFAS
referred Kleber’s case to Treasury on September 4, 2001, and that
on September 30, 2004, Treasury referred the debt back to DFAS as
uncollectible. Respondent asserts that this evidence proves that
DFAS engaged in significant, bona fide collection activity from
1999 to 2006, rebutting the presumption that an identifiable
event occurred in 2002.
Despite respondent’s summary of events, he has failed to
provide any information describing any substantive collection
activities that took place. Between April 6, 1999, and the day
DFAS issued Kleber Form 1099-C in 2006, petitioners did not
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receive any correspondence with respect to any indebtedness
pursuant to the lease. Respondent has failed to provide any
evidence of the existence of a lien, the sale or packaging for
sale of Kleber’s debt, or any other activity that would be
indicative of an active creditor. Although sufficient to meet
respondent’s burden of production under section 6201(d), the
evidence respondent provided failed to indicate an identifiable
event or a Government policy to rebut the presumption that the
identifiable event occurred in 2002. Accordingly, we hold that
petitioners did not have any COI income from DFAS with respect to
the lease for 2006.3
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,
116 T.C. 438, 446-447 (2001). In view of our holding above,
respondent has failed to meet his burden of production with
3
Petitioners further dispute the amount of the debt on Form
1099-C. However, because of our holding herein we find it
unnecessary to address his claim.
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respect to the penalty. Accordingly, we hold that petitioners
are not liable for the accuracy-related penalty.
The Court, in reaching its holdings, 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 petitioners.