T.C. Summary Opinion 2003-169

UNITED STATES TAX COURT

CHARLES & MARIANNE T. ANDERSON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4656-02S. Filed December 18, 2003.

Charles and Marianne T. Anderson, pro sese.

Daniel N. Price, for respondent.

DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

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

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority. 
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1 In the notice of deficiency respondent determined that

petitioners failed to report interest income in the amount of

$120 and dividend income in the amount of $3 for taxable year

1999. Petitioners have conceded these issues. 

Respondent determined for 1999 a deficiency in petitioners’

Federal income tax of $420. After concessions,1 the issue

remaining for decision is whether petitioners failed to report

cancellation of indebtedness income in the amount of $1,372 for

taxable year 1999. Marianne Anderson has already conceded this

issue. 

Background

The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference. Petitioners

resided in Georgetown, Texas, at the time the petition was filed. 

This case involves unreported cancellation of indebtedness

income. Charles Anderson (petitioner) provided a credit card for

a friend, Ms. Feathers, on his existing Citibank account. 

Although the account was in his name, petitioner and Ms. Feathers

agreed she would be responsible for the debts she incurred. 

The Citibank Card Agreement applicable to petitioner’s

account states “You may request additional cards on your account

for yourself or others and you may permit another person to have

access to the card or account number. However, if you 
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do, you must pay us for all charges made by those persons,

including charges for which you may not have intended to be

responsible.” 

As petitioner received billing statements detailing charges

to the account, he forwarded them to Ms. Feathers for payment. 

Ultimately, Ms. Feathers incurred $4,574.93 in charges on the

credit card. 

Petitioner was subsequently contacted by a collection agency

on behalf of Citibank. He was informed of the $4,574.93

delinquent balance and was offered the opportunity to settle the

debt. In July 1999 petitioner settled the outstanding debt for

$3,202.45, or 70 percent of the total value. Citibank reported

$1,372 as cancellation of indebtedness income to respondent on

Form 1099-C, Cancellation of Debt. Petitioners did not report

this income on their joint income tax return. Petitioner denied

receiving a Form 1099-C reporting the amount of debt discharged. 

Petitioner disputes having income from the discharge of

$1,372 of the debt and, raising a variety of arguments, contends

that a discharge of indebtedness does not constitute gross

income. 

Discussion

Respondent's determinations in the notice of deficiency are

presumed correct, and, generally, petitioners must prove those

determinations wrong in order to prevail. Rule 142(a)(1); Welch
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v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof may

shift to the Commissioner under section 7491 in certain

circumstances. See Prince v. Commissioner, T.C. Memo. 2003-247. 

The issue in this case is a question of law and does not depend

on which party has the burden of proof.

A. Discharge of Indebtedness

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). This means

that a taxpayer who has incurred a financial obligation, which

obligation is later discharged or released, has realized an

accession to income. Sec. 61(a)(12); United States v. Kirby

Lumber Co., 284 U.S. 1, 3 (1931); Friedman v. Commissioner, 216

F.3d 537, 545 (6th Cir. 2000), affg. T.C. Memo. 1998-196. The

rationale of this principle is that the discharge of a debt below 

the face value of the debt accords the debtor an economic benefit

equivalent to income. Friedman v. Commissioner, 216 F.3d at 545.

The treatment of discharge-of-indebtedness income parallels

the Code's treatment of loans. Toberman v. Commissioner, 294

F.3d 985, 988 (8th Cir. 2002), affg. in part and revg. in part

T.C. Memo. 2000-221. Borrowed funds are not included in a

taxpayer’s income. Nor are repayments of a loan deductible from

income. When, however, one’s obligation to repay the funds is

settled for less than the amount of the loan, one ordinarily
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realizes income from discharge of indebtedness. Sec. 61(a)(12); 

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). 

The difference between the face value of the debt and the amount

paid in satisfaction of the debt is includable in the taxpayer’s

gross income. Babin v. Commissioner, 23 F.3d 1032, 1034 (6th

Cir. 1994), affg. T.C. Memo. 1992-673.

Accompanying the discharge of indebtedness income rule are

certain exclusions from gross income. Sec. 108(a)(1). 

Petitioner has not raised any of the exclusions, and thus the

Court does not consider them.

B. Form 1099

Petitioner claims he did not receive a Form 1099-C from

Citibank discharging the debt. “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 to a nontaxable item. Vaughan v. Commissioner, T.C. Memo.

1992-317, affd. without published opinion 15 F.3d 1095 (9th Cir.

1993).

Conclusion

The Court has considered all arguments made by petitioner

and, to the extent they are not addressed herein, concludes they
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are irrelevant or without merit. The Court holds petitioner had

discharge of indebtedness income in the amount of $1,372.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for respondent.