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: 

1Unless 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

2This 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. 1.6050P1(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. 1.6050P1(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 accuracyrelated 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

3Petitioners 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.