*54 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
DAWSON, Judge: This case was heard pursuant to
Respondent determined a $ 6,860 deficiency in petitioners' Federal income tax and a $ 1,372 accuracy-related penalty under
Background
Some of the facts were stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. Petitioners resided in Layton, Utah, when they filed the petition in this case.
Mrs. Gale is a homemaker and earns no income. Mr. Gale is employed by the Bureau of Land Management.
In 2003, Mr. Gale had back surgery and was out of work for several weeks. He did not receive a pay check for some weeks. Consequently, petitioners were unable to make the payments on two loans secured by mortgages on their home, a first mortgage held by First National Mortgage (First National) and a second mortgage held*56 by Citibank. First National notified petitioners that it intended to foreclose on the loan and suggested that they contact a real estate broker to arrange a short sale. 3
On June 23, 2003, petitioners sold the house for $ 68,500. They incurred and paid settlement costs and taxes totaling $ 1,954.50, paid the total $ 61,615.50 balance outstanding on the first mortgage, and paid $ 1,500 of the total $ 40,775 balance outstanding on the second mortgage. Citibank forgave the remaining $ 39,275 outstanding on the second mortgage.
Petitioners' records show that petitioners' assets and liabilities before the sale of the house were as follows:
Assets Totals
______ ______
House*57 $ 68,500
Blazer 25,000
Cash accounts 1,068
Investments - 0 -
Jewelry 1,500
Computer 400
Furniture/appliances 2,000
CSRS pension NA
Thrift savings account NA
Liabilities Totals
1st mortgage 61,616
2nd mortgage 40,774
RC Willey 1,300
Providian 2,250
Chase Mastercard 5,000
AmeriCredit 32,465
Medical 550
Medicine 900
Discover card 2,500
Texaco *58 1,500
Mrs. Gale's student loan 6,000
Dentist 1,100
Petitioners purchased the 2001 Blazer in January 2001 for $ 32,000. Mr. Gale estimated that the Blazer was worth $ 25,000 when the second mortgage was canceled. He did not consult any publication showing used car values.
Petitioners' records do not show the value of Mr. Gale's CSRS pension benefit or thrift savings account at the time the second mortgage was canceled. Mr. Gale believed that had he retired in 2003, his CSRS pension benefit would have been approximately $ 858 per month. Mr. Gale contributed to a thrift savings account from about 1984 to 1990. He did not make any contributions to his thrift savings account after 1990. In 1998, Mr. Gale borrowed from his thrift savings account to make the downpayment on the house.
Petitioners employed Julie K. Young of JKY Tax Service to prepare their 2003 Form 1040, U.S. Individual Income Tax Return. Petitioners jointly filed the return prepared by Ms. Young. Petitioners did not report the $ 39,275 discharge of indebtedness as income on the return.
Citibank sent petitioners*59 a Form 1099-C, Cancellation of Debt, reporting the $ 39,275 discharge of indebtedness. After petitioners received the Form 1099-C, Ms. Young prepared and petitioners filed an amended return that reported the $ 39,275 as gain on the sale of their residence that was excludable from income.
Discussion
A. DeficiencyIn general, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing that such determinations are in error.
Generally, discharge of indebtedness gives rise to gross income to the obligor.
Petitioners did not submit to respondent or to the Court any contemporaneous records or documents to establish the value of their assets or liabilities at the time the second mortgage was canceled. The night before the trial petitioners created a list of their assets and liabilities from information stored on their computer. Petitioners relied upon that list and Mr. Gale's oral testimony as evidence of the value of assets owned and liabilities owed in 2001 immediately before the discharge. Having observed Mr. Gale's appearance and demeanor at trial, we find his testimony to be honest, forthright, and credible. Immediately before the discharge of indebtedness, without regard to Mr. Gale's*61 CSRS pension benefit and thrift savings account, petitioners had liabilities of $ 92,839 which exceeded the $ 29,968 value of their assets by $ 62,871, shown as follows:
Assets
Blazer $ 25,000
Cash accounts 1,068
Investments -0-
Jewelry 1,500
Computer 400
Furniture/appliances 2,000
Total assets $ 29,968
Liabilities
2nd mortgage 39,274
RC Willey 1,300
Providian 2,250
Chase Mastercard 5,000
AmeriCredit 32,465
Medical 550
Medicine 900
Discover card *62 2,500
Texaco 1,500
Mrs. Gale's stud. 6,000
Dentist 1,100
Total liabilities (92,839)
Net liabilities (62,871)
Although Mr. Gale believes that his CSRS pension benefit would have been about $ 858 per month had he retired in 2003, he did not provide any statements related to the value of that pension or his thrift savings account on the date the second mortgage was canceled. We have no way to accurately estimate the value of those assets on the date the second mortgage was canceled, and petitioners have not established that the combined value of Mr. Gale's thrift savings account and CSRS pension benefit was less than $ 62,871 on that date. Consequently, petitioners have failed to establish that they were insolvent when the debt was canceled and that the insolvency exception of
We hold that petitioners' income for 2003 includes $ 39,274 from the discharge of indebtedness that was not*63 reported on their 2003 return.
B. Accuracy-Related PenaltyRespondent contends that petitioners are liable for an accuracy- related penalty under
The penalty under
We are convinced that petitioners provided Ms. Young with all the necessary information concerning the sale of their home and the cancellation of the second mortgage by Citibank. Petitioners reasonably relied on Ms. Young. Consequently, we hold that petitioners are not liable for the
To reflect the foregoing,
Decision will be entered for respondent with respect to the deficiency and for petitioners with respect to the
Footnotes
1. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue. Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. In the notice of deficiency, respondent also made adjustments to deductions for medical and dental expenses petitioners reported on Schedule A, Itemized Deductions, that are computed on the basis of the increase in petitioners' adjusted gross income.↩
3. A short sale in real estate occurs when the outstanding loans against a property are greater than what the property is worth and the lender agrees to accept less than it is owed to permit a sale of the property which secures its note.↩