T.C. Memo. 2008-172

UNITED STATES TAX COURT

RAY JACKSON WINN AND MARGARET G. WINN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19007-06. Filed July 21, 2008.

Ray Jackson Winn and Margaret G. Winn, pro sese.

K. Lyn Hillman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined a deficiency of

$1,657 in petitioners’ 2004 Federal income tax. The issue for

decision is whether petitioners had unreported cancellation of

debt income for 2004. Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the
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1 The record is unclear as to the exact amount of the

credit card debt before it went into collection. 

year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioners resided in

Texas when they filed their petition. 

Ray Jackson Winn (petitioner) had a credit card account with

Providian Bank (credit card). Ray Jackson Winn (petitioner)

incurred and then failed to pay a substantial amount of debt

amassed on the credit card.1 Providian Bank sold petitioner’s

credit card account to Chase Manhattan Bank USA, N.A. (Chase). 

Chase sued Ray Jackson Winn (petitioner) in the 216th Judicial

District Court of Bandera County, Texas (district court), because

it could not collect the credit card debt from him. Chase

notified petitioner via certified mail of the motion for summary

judgment that it had filed in the district court.

On August 1, 2003, the district court awarded Chase a

judgment of $27,859.49, plus 7.99 percent interest per annum from

March 29, 2002, to August 1, 2003, $7,167.65 for attorney’s fees,

and postjudgment interest of 10 percent per annum from August 1,

2003, to the date of payment which applied to the entire judgment
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award including attorney’s fees (the judgment debt). On March

19, 2004, Chase settled with petitioner for $19,021.50 as full

payment for the judgment debt. At the date of settlement, the

face value of the judgment debt totaled approximately $40,000. 

Chase reported to the Internal Revenue Service (IRS) that

petitioner had $11,044 of cancellation of debt income for 2004.

Petitioners did not report any cancellation of debt income on

their timely filed 2004 Form 1040, U.S. Individual Income Tax

Return.

Respondent issued a notice of deficiency to petitioners for

2004 determining that the $11,044 reported by Chase as

cancellation of debt income constituted unreported gross income. 

OPINION

I. Burden of Proof

Generally, a notice of deficiency is presumed correct, and

the taxpayer bears the burden of proving that the determination

is erroneous. See Welch v. Helvering, 290 U.S. 111, 115 (1933). 

The U.S. Court of Appeals for the Fifth Circuit, where an appeal

in this case lies, has recognized, however, that “a court need

not give effect to the presumption of correctness in a case

involving unreported income if the Commissioner cannot present

some predicate evidence supporting its determination.” Portillo

v. Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), affg. in

part, revg. in part and remanding in part T.C. Memo. 1990-68. If
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the presumption of correctness does not apply, the Commissioner’s

determination will be deemed arbitrary, and he will bear the

burden of proving it correct. See also secs. 7491(a), 6201(d).

Petitioners dispute the correctness of the notice of

deficiency and argue that the IRS has not shown how it calculated

the unreported income. 

This case is distinguishable from Portillo v. Commissioner,

supra. In Portillo the IRS presented no evidence of the alleged 

underreported income other than the difference between Mr.

Portillo’s contractor’s Form 1099 and Mr. Portillo’s tax return. 

Here respondent has provided credit card records of the debt,

copies of the district court judgment against petitioner, and

copies of the checks petitioners sent to settle the debt with

Chase. Portillo dealt with a situation where the IRS did not

supply predicate evidence of the unreported income. This is not

such a situation because respondent supplied predicate evidence

supporting the notice of deficiency. Therefore, petitioners

still bear the burden of proof, and the notice of deficiency is

presumed correct. 

II. Cancellation of Debt Income

Gross income includes all income from whatever source

derived. Sec. 61(a). Discharge of indebtedness is specifically

included as an item of gross income. Sec. 61(a)(12). The

difference between the face value of the debt and the amount paid
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2 $27,859.49 plus $7,167.65 (attorney’s fees) equals

$35,027.14, plus costs (which are not listed and are not part of

the record) in total judgment debt on the date the judgment was

entered. 

3 During the Tax Court trial Mr. Parsons, Chase’s attorney

(continued...)

in satisfaction of the debt is in general includable in the

taxpayer’s gross income. Babin v. Commissioner, 23 F.3d 1032,

1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.

Petitioners do not dispute that they had cancellation of

debt income, only that respondent’s calculation of $11,044 in

cancellation of debt income was arbitrary and incorrect. 

However, this argument fails for the reasons set out below. 

Petitioners do not dispute that petitioner incurred the

credit card debt. The district court entered the following

judgment:

CHASE MANHATTAN BANK USA, N.A. successor in interest

to, a national banking association, does have and

recover judgment from and against the Defendant, RAY J.

WINN, in the sum and amount of $27,859.49, together

with interest on said indebtedness at the rate of 7.99%

per annum from March 29, 2002 until date of entry of

this Judgment, plus $7,167.65 for Plaintiff’s

reasonable, statutory attorneys’ fees and for all costs

of court in this [sic] behalf expended, with interest

on the entire amount at the rate of 10% per annum from

date of judgment until paid; * * *

On the date of the judgment, without including any interest there

was total judgment debt of at least $35,027.14.2 By March 19,

2004, petitioner’s total judgment debt including interest totaled

approximately $40,000.3 Petitioner settled with Chase on that
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3(...continued)

in the district court case against petitioner, when asked about

the full amount of petitioner’s debt to Chase on the date of

settlement testified that “The amount of the judgment, I am going

to have to approximate, was $40,000. The settlement that was

offered was 50 percent of the judgment balance.” 

date for $19,021.50 as full satisfaction of that debt. When

$19,021.50 is subtracted from either the approximate amount of

the total judgment debt on March 19, 2004, or the amount as of

the date the judgment was entered, there is at least $11,044 in

cancellation of debt income. Petitioners have not made any

arguments that any of the section 108 cancellation of debt

exceptions applies. Therefore, we hold that respondent’s

determination is correct in that petitioners had at least $11,044

of cancellation of debt income. 

In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we conclude they are irrelevant or without

merit. 

To reflect the foregoing,

Decision will be entered

for respondent.