United States Tax Court

T.C. Memo. 2023-107

STEVEN JACOBOWITZ,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 14387-19. Filed August 16, 2023.

—————

Thomas S. Groth, for petitioner.

William C. Bogardus, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ASHFORD, Judge: By statutory notice of deficiency dated April 

29, 2019, the Internal Revenue Service (IRS or respondent) determined 

a deficiency in petitioner’s federal income tax of $15,266 for the 2016 

taxable year. After certain concessions by petitioner,1 the issue 

remaining for decision is whether for 2016 petitioner must include in 

gross income cancellation of indebtedness (COD) income of $34,964.2 

We hold he must.

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 

1 By way of a Stipulation of Settled Issues petitioner conceded that he is liable 

for unreported education program payments of $1,412, as well as an unreported 

additional 10% tax of $141 on the education program payments.

2 Some monetary amounts are rounded to the nearest dollar.

Served 08/16/23
2

[*2] by this reference. Petitioner resided in Connecticut when his 

Petition was timely filed with the Court. 

Petitioner was the sole member of an entity named 

Sagasolutions.com (Sagasolutions), a single-member limited liability 

company he established in November 2003. Sagasolutions ceased to 

exist in approximately May 2008. During its existence it designed and

delivered technical solutions to companies having problems in the areas 

of customer service, sales, and marketing. Additionally, during its 

existence it was a disregarded entity for federal income tax purposes; it 

never filed Form 8832, Entity Classification Election, with the IRS to be 

classified otherwise. The last year for which Sagasolutions’ income (or 

loss) was reported to the IRS was 2009. 

On January 17, 2006, Sagasolutions secured a $25,000 small 

business line of credit with Connecticut-based Newtown Savings Bank 

(Newtown). In connection with this line of credit petitioner executed on 

Sagasolutions’ behalf a promissory note and a security agreement. The 

promissory note set forth the terms of the line of credit, including the 

interest rate, the minimum advance amount, the monthly principal 

repayment amount and date, the amounts for finance charges and other 

fees, and that the line of credit would be linked as overdraft protection 

to petitioner’s personal checking account, also at Newtown.3 The 

security agreement set forth in pertinent part what property of 

Sagasolutions was pledged as security for the repayment of the line of 

credit and under what circumstances Sagasolutions would be in default 

of its payment or other obligations with respect to the line of credit.

Sagasolutions took advances from, and made payments to, the 

line of credit numerous times from January 2006 to September 2010. 

The first advance, of $7,000, was on January 24, 2006, and the last, of 

$625, was on April 5, 2010. When Sagasolutions’ last principal payment 

of $52 was made on September 27, 2010, the outstanding principal 

balance for the line of credit was $24,948.

Newtown sent Sagasolutions and the IRS a Form 1099−C, 

Cancellation of Debt, for 2016. This form indicated that as of December 

30, 2016, Newtown had discharged the outstanding principal balance 

and accrued interest, which totaled $34,964, after the September 27, 

3 Sagasolutions had its own bank account at Newtown over which petitioner 

had sole signature authority; alternatively, the line of credit may have been linked as 

overdraft protection to that bank account.
3

[*3] 2010, payment owed on the line of credit. The form also indicated 

that the reason for the discharge was “Statute of limitations or 

expiration of deficiency period.”

Petitioner prepared and timely filed (with the assistance of Ernst 

& Young as required by his employer at the time) his 2016 federal 

income tax return. As relevant here, on this return petitioner reported 

adjusted gross income of $709,153, consisting of wages of $707,265, 

taxable interest of $13, taxable dividends of $1,411, and capital gains of 

$464. Petitioner did not report on this return the COD income totaling 

$34,964.

Following an examination of petitioner’s 2016 federal income tax 

return, the IRS determined in pertinent part that the outstanding 

principal balance and accrued interest owed on the line of credit that 

Newtown discharged, totaling $34,964, was taxable “other”/COD income 

to petitioner. The April 29, 2019, notice of deficiency issued to petitioner 

reflects this determination. 

OPINION

I. Burden of Proof

As a preliminary matter we address who has the burden of proof 

in this case.

In general, the IRS’s determinations set forth in a notice of 

deficiency are presumed correct, and the taxpayer bears the burden of 

proving otherwise. Rule 142(a);4 Welch v. Helvering, 290 U.S. 111, 115 

(1933). For this presumption to adhere in cases (such as this one) 

involving unreported income, the Commissioner must provide some 

reasonable foundation connecting the taxpayer to the income-producing 

activity. El v. Commissioner, 144 T.C. 140, 142−43 (2015) (citing 

Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir. 1981), aff’g in part, 

rev’g in part and remanding 74 T.C. 260 (1980)). Once the 

Commissioner has done this, the burden shifts to the taxpayer to prove 

by a preponderance of the evidence that the Commisioner’s

determinations are arbitrary or erroneous. Id. at 143. Similarly, under 

section 6201(d), if a taxpayer in any court proceeding asserts a 

4 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are 

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, 

and Rule references are to the Tax Court Rules of Practice and Procedure. 
4

[*4] reasonable dispute with respect to any item of income reported on 

an information return (such as a Form 1099−C) and has fully cooperated 

with the Commissioner, then the Commissioner shall have the burden 

of producing reasonable and probative information concerning the

deficiency, in addition to the information return. See also Kleber v. 

Commissioner, T.C. Memo. 2011-233, slip op. at 5.

It is undisputed that Sagasolutions was a single-member limited 

liability company with petitioner as its sole member and that petitioner, 

on behalf of Sagasolutions, executed a promissory note and a security 

agreement for a line of credit with Newtown. It is also undisputed that 

Sagasolutions had an outstanding line of credit balance of $24,948 and 

that Newtown forgave that outstanding balance plus accrued interest, 

which totaled $34,964; with respect to that $34,964, Newtown sent the 

IRS and Sagasolutions a Form 1099−C, and petitioner’s dispute, as 

discussed below, involves solely whether the $34,964 is taxable COD 

income to him (and thus not as to the accuracy of the form). On the basis 

of this undisputed evidence, we are satisfied that respondent has 

provided a reasonable foundation connecting petitioner with the 

unreported income. The burden thus shifts to petitioner to show that 

the IRS’s determination with respect to this income was arbitrary or 

erroneous.5

II. COD Income

A taxpayer’s gross income includes “all income from whatever 

source derived,” including COD income. § 61(a)(12).6 “The underlying 

rationale for the inclusion of canceled debt as income is that the release 

from a debt obligation the taxpayer would otherwise have to pay frees 

up assets previously offset by the obligation and acts as an accession to 

wealth—i.e., income.” Weiderman v. Commissioner, T.C. Memo. 2020-

109, at *23 (quoting Bui v. Commissioner, T.C. Memo. 2019-54, at *7−8); 

see also Landreth v. Commissioner, 50 T.C. 803, 813 (1968) (“Where a 

debtor is relieved of his obligation to repay the loan, his net worth is 

increased over what it would have been if the original transaction had 

5 Petitioner does not otherwise contend that the burden of proof as to any 

matter should shift to respondent under section 7491(a), nor has he established that 

the requirements for shifting the burden of proof under that section have been met. 

Accordingly, the burden of proof remains on petitioner. See § 7491(a)(2).

6 In 2017 section 61 was amended, with section 61(a)(12) becoming section 

61(a)(11). See Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97,

§ 11051(b)(1), 131 Stat. 2054, 2089.
5

[*5] never occurred. This real increase in wealth may be properly 

taxable.” (citing United States v. Kirby Lumber Co., 284 U.S. 1 (1931))). 

COD income is recognized for the year in which the debt is canceled and 

is taxed at ordinary rates. Weiderman, T.C. Memo. 2020-109, at *23−24 

(and cases cited thereat).

As indicated supra p. 4, petitioner does not dispute that 

Sagasolutions owed $24,948 (plus interest) to Newtown and that 

Newtown canceled that debt, which, as of the December 30, 2016, 

cancellation date, totaled $34,964. Instead, petitioner contends that (1) 

this COD income should not be attributed to him but to Sagasolutions; 

(2) the debt in any event was discharged before 2016; (3) any COD 

income that may be attributed to him should be characterized as capital 

gain; and (4) the portion of the COD income that is interest is excludable 

from his gross income pursuant to section 108(e)(2). Below we address 

each contention in turn. 

A. Tax Consequences to Petitioner of Sagasolutions’ 

Discharged Debt 

Petitioner contends that the COD income arising from Newtown’s 

discharge of Sagasolutions’ debt should not be attributed to him but 

rather to Sagasolutions. Petitioner relies on Conn. Gen. Stat. § 34-

251a(a) (2017), which provides:

A debt, obligation or other liability of a limited liability 

company is solely the debt, obligation or other liability of 

the company. A member or manager is not personally 

liable, directly or indirectly, by way of contribution or 

otherwise, for a debt, obligation or other liability of the 

company solely by reason of being or acting as a member or 

manager. This subsection applies regardless of the 

dissolution of the company.

His rationale is that despite his being Sagasolutions’ sole member, 

because he did not personally guarantee Sagasolutions’ line of credit 

with Newtown, his individual assets cannot be reached to satisfy any 

outstanding line of credit balance; as a result he did not realize any 

taxable income when Newtown discharged the debt. Under petitioner’s 

rationale, without a personal guaranty, for a disregarded entity there 

can be no tax consequences for discharged indebtedness. Such a 

rationale is ill conceived.
6

[*6] Although state law governs the legal relationships that are 

established when an entity is formed, federal law governs whether an 

entity is taxed, or disregarded, as a corporation. Moye v. Commissioner, 

T.C. Memo. 1997-554, slip op. at 15 (and cases cited thereat). Treasury

Regulation §§ 301.7701-1 through 301.7701-3 provide rules for the 

classification of business entities for federal tax purposes. Known as the 

“check-the-box” regulations, these regulations generally grant broad 

discretion to business owners, who can often elect (by “checking the box” 

for a certain entity type on a form filed with the IRS, hence the name) 

whether an entity through which they conduct business is treated as an 

association (i.e., a corporation), a partnership, or a disregarded entity 

for federal tax purposes. Treas. Reg. § 301.7701-3(a); see also DAF 

Charters, LLC v. Commissioner, 152 T.C. 250, 259–60 (2019) (and cases 

cited thereat).

The check-the-box regulations do not always grant entity owners 

a choice, though, listing some types of entities that are irrevocably 

considered corporations. DAF Charters, LLC, 152 T.C. at 260 (citing

Treas. Reg. § 301.7701-2(b)). Entities not in this list may elect their 

treatment, and the regulations provide default options for entities that 

fail to choose. Id. (citing Treas. Reg. § 301.7701-3(b)). In particular, a 

domestic entity that is not a corporation and has a single owner is 

disregarded as an entity separate from its owner unless the owner elects 

otherwise. Id. (citing Treas. Reg. §§ 301.7701-2(c)(2)(i), 301.7701-

3(b)(1)(ii)). The effect of being disregarded is that, in general, the entity 

is treated as a sole proprietorship or branch of its owner. Id. (citing 

Treas. Reg. § 301.7701-2(a)). Although the entity may be recognized 

separately from its owner under state or other federal law, any items of 

income and loss generated by the entity are directly attributable to and 

reported by the entity’s owner for federal tax purposes (and the entity is 

not subject to corporate income tax or any partnership or S corporation 

income allocation rules, all of which are codified under subtitle A of the 

Code).7 Id.

7 We also note that, pursuant to Treasury Regulation § 1.108-9(a)(3), the 

insolvency exclusion of section 108(a)(1)(B) applies to the discharged indebtedness of a 

disregarded entity at the ownership level, i.e., the insolvency exclusion applies to the 

discharged indebtedness of a disregarded entity only to the extent the owner of the 

disregarded entity is insolvent; if the disregarded entity is insolvent, but the owner of 

the disregarded entity is not, then the section 108(a)(1)(B) exclusion does not apply to 

the discharge of indebtedness income. This regulation would be superfluous if, as 

petitioner contends, there is no recognition of income from the discharge of debt for the 

disregarded entity.
7

[*7] Sagasolutions never filed Form 8832 with the IRS electing to be 

treated as a corporation. As a result, Sagasolutions is treated as a 

disregarded entity for federal tax purposes, see Treas. Reg. § 301.7701-

2(a); see also Comensoli v. Commissioner, T.C. Memo. 2009-242, slip op. 

at 8, aff’d, 422 F. App’x 412 (6th Cir. 2011), and petitioner, as its sole 

member, is required to report on his federal income tax return any 

income (or loss) attributable to Sagasolutions. Thus, petitioner should 

have reported COD income of $34,964, i.e., the amount of Sagasolutions’ 

debt that Newtown discharged.

B. Timing of the Debt Cancellation

Petitioner next contends that Sagasolutions’ debt was discharged 

before 2016. In support of his contention, petitioner claims that (1) the 

property used to secure the line of credit was abandoned in 2008 and

(2) Sagasolutions’ last payment to the line of credit was in 2008. 

Petitioner’s contention is without merit.

The question as to the year in which a debtor’s obligation is 

canceled (thus giving rise to COD income) is one of fact to be determined 

on the basis of the evidence. Miller Tr. v. Commissioner, 76 T.C. 191, 

195 (1981). A debt is deemed discharged (and COD income is generated) 

the moment it becomes clear that the debt will never have to be paid. 

Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). Determining when that 

moment occurs requires a practical assessment of the facts and 

circumstances relating to the likelihood of payment. Id. (and cases cited 

thereat). “Any ‘identifiable event’ which fixes the loss with certainty 

may be taken into consideration.” Id. (citing United States v. S.S. White 

Dental Mfg. Co., 274 U.S. 398 (1927)).

Treasury Regulation § 1.6050P-1(b)(2) provides an exclusive list 

of seven “identifiable events” which constitute a discharge of debt for 

canceled debt information reporting purposes under section 6050P. The 

occurrence of one or more of these events triggers a creditor’s obligation 

to send a Form 1099−C to the IRS and the debtor reporting the COD 

income. Treas. Reg. § 1.6050P-1(a). As relevant here, the third of the 

seven “identifiable events” giving rise to COD income (and thus the 

reporting requirement), provided in Treasury Regulation § 1.6050P1(b)(2)(i)(C), is “[a] cancellation or extinguishment of an indebtedness 

upon the expiration of the statute of limitations for collection of an 

indebtedness, subject to the limitations described in paragraph (b)(2)(ii) 

of this section, or upon the expiration of a statutory period for filing a 
8

[*8] claim or commencing a deficiency judgment proceeding.” (Emphasis 

added.)

With respect to abandoning the property of Sagasolutions that 

secured the line of credit, petitioner testified at trial that when 

Sagasolutions ceased to exist in 2008, he “left a lot of . . . furniture” 

where it had an office and “was shocked in 2009 that [Newtown] hadn’t 

come after [him] for whatever was left of Saga[solutions].” We need not, 

and do not, accept petitioner’s self-serving testimony when he has failed 

to present credible, corroborative, documentary evidence. See Tokarski 

v. Commissioner, 87 T.C. 74, 77 (1986). Petitioner offered no evidence 

of what furniture was left behind or its value, nor of whether Newtown 

was ever informed of the alleged abandonment.

In his opening brief petitioner on the one hand claims that “[i]t is 

clear from the evidence . . . that [Sagasolutions] was no longer making 

any payments [with respect to its line of credit with Newtown] as early 

as 2008,” but then on the other hand just a few sentences later in his 

brief he contends that “it is clear from the Transaction History that no 

payments were being made [with respect to the line of credit] 

subsequent to September 2010.” The documentary evidence in this case 

shows that Sagasolutions defaulted on its line of credit sometime in 2010 

(not 2008), and at the latest on October 5, 2010, which was the next due 

date with respect to the line of credit after a final principal payment of 

$52 was made in September 2010.

Connecticut law mandated that Newtown bring an action within 

six years of when the action accrued. See Conn. Gen. Stat. § 52-576(a)

(1971) (“No action for an account, or on any simple or implied contract, 

or on any contract in writing, shall be brought but within six years after 

the right of an action accrues . . . .”). With Newtown’s right of action 

accruing sometime in 2010 (and at the latest on October 5, 2010), its 

opportunity to bring an action with respect to the line of credit expired 

sometime in 2016 (and no later than October 5, 2016). Newtown did not 

bring an action (nor did it attempt to seize or foreclose on any of 

Sagasolutions’ property that was pledged as security for the repayment 

of the line of credit) during the 2010–16 timeframe. When the six-year 

period for bringing a claim expired, an identifiable event occurred and 

it triggered Newtown’s obligation under section 6050P and the 

accompanying Treasury regulations to issue Form 1099−C. Newtown 

properly did so, indicating that as of December 30, 2016, it had 

discharged the outstanding principal and accrued interest owed on the 

line of credit (totaling $34,964) because the time in which to bring a 
9

[*9] claim had expired. Consequently, 2016 was the correct year of the 

discharge of Sagasolutions’ debt.

C. Characterization of the Discharged Debt

Petitioner further contends that any COD income that may be 

attributable to him should be characterized as capital gain. In support 

of his contention, he relies on L&C Springs Assocs. v. Commissioner, 188 

F.3d 866 (7th Cir. 1999), aff’g T.C. Memo. 1997-469, and 2925 Briarpark,

Ltd. v. Commissioner, 163 F.3d 313 (5th Cir. 1999), aff’g T.C. Memo. 

1997-298.8 Petitioner’s contention is without merit.

In L&C Springs Assocs., the U.S. Court of Appeals for the Seventh 

Circuit did not opine on the nature of the income, which is the focus of 

the dispute here; rather, at issue in L&C Springs Assocs. was at what 

time the taxpayer abandoned certain property, thereby triggering gain 

from cancellation of indebtedness for purposes of section 1001. L&C 

Springs Assocs., 188 F.3d at 868. In 2925 Briarpark, Ltd., the issue was 

whether the taxpayer-partner and the limited partnership realized gain 

from dealings in property under section 61(a)(3), rather than 

cancellation of indebtedness income under section 61(a)(12); the U.S. 

Court of Appeals for the Fifth Circuit did not opine on whether the gain 

was capital. Sagasolutions and Newtown never agreed that 

Sagasolutions would surrender or abandon the property that secured 

the line of credit in exchange for Newtown’s canceling the debt, and 

petitioner has taken no steps to show that the resulting COD income 

was from the exchange of a capital asset as defined in section 1221. The 

COD income is ordinary income under section 61(a)(12).

D. Amount of COD Income

Lastly, petitioner contends that because the line of credit was a 

business loan and the interest paid with respect thereto would have 

8 In a footnote in his opening brief petitioner also attempts to draw support 

from I.R.S. Priv. Ltr. Rul. 202050014 (Dec. 12, 2020) (which he refers to as “PLR117300-20”). A “written determination” of the IRS may not be used or cited as 

precedent, § 6110(k)(3), and written determinations are defined to include IRS private 

letter rulings, § 6110(b)(1)(A); see also Plano Holding LLC v. Commissioner, T.C. 

Memo. 2019-140, at *17 n.6 (“Private letter rulings have no precedential value and 

merely represent the Commissioner’s position as to a particular set of facts.”) (and 

cases cited thereat). In any event, I.R.S. Priv. Ltr. Rul. 202050014 is not helpful to 

petitioner. Like L&C Springs Assocs. and 2925 Briarpark, Ltd., as discussed above, 

I.R.S. Priv. Ltr. Rul. 202050014 addresses a situation factually distinct from the 

instant case. 
10

[*10] been a deductible business expense, the portion of the COD income 

that is interest ($10,016) is excludable from his gross income under 

section 108(e)(2). Petitioner’s contention is without merit.

Section 108(e)(2) provides that no income shall be realized from 

the discharge of indebtedness to the extent that payment of the liability 

would have given rise to a deduction. As tax deductions are a matter of 

legislative grace, Segel v. Commissioner, 89 T.C. 816, 842 (1987), the 

taxpayer has the burden of (1) proving that any claimed deduction is 

allowable pursuant to some statutory provision and (2) substantiating 

the expense giving rise to the claimed deduction by maintaining 

adequate records, § 6001; Higbee v. Commissioner, 116 T.C. 438, 440 

(2001); Hradesky v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per 

curiam, 540 F.2d 821 (5th Cir. 1976). Section 163(h)(1) provides that in 

the case of a taxpayer other than a corporation no deduction is allowed 

for personal interest paid or accrued during the taxable year. Interest 

paid or accrued on indebtedness properly allocable to a trade or business 

is excluded from the definition of personal interest and so is deductible. 

§ 163(h)(2)(A).

Petitioner offered no evidence at trial that the $10,016 of interest, 

which accrued after the last principal payment was made with respect 

to the line of credit, would have been an ordinary and necessary business 

expense. Statements in a party’s brief, such as petitioner’s assertion 

regarding the interest, are not part of the evidentiary record. See Rule 

143(c) (“[S]tatements in briefs . . . do not constitute evidence.”); see also 

Ashkouri v. Commissioner, T.C. Memo. 2019-95, at *36. Indeed, the 

evidentiary record unmistakably shows that Sagasolutions stopped 

doing business in 2008 and that 2009 was the last year that 

Sagasolutions’ income (or loss) was reported to the IRS, before the 

interest started accruing in 2010. Accordingly, the total amount of the 

canceled debt, i.e., $34,964, is COD income to petitioner for 2016.

E. Conclusion

In sum, petitioner has not shown that the IRS’s determination 

with respect to the COD income of $34,964 for 2016 was arbitrary or 

erroneous. Accordingly, we sustain the IRS’s determination.
11

[*11] We have considered all of the arguments made by the parties and, 

to the extent they are not addressed herein, we find them to be moot, 

irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.