T.C. Memo. 2005-283

UNITED STATES TAX COURT

TIMOTHY J. COBURN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6695-04. Filed December 6, 2005.

Richard A. Seigal and Mark S. Gregory, for petitioner.

Michael J. Proto, for respondent.

MEMORANDUM OPINION

WELLS, Judge: Respondent determined a deficiency in

petitioner’s 2000 Federal income tax of $277,951 and a section

6662 accuracy-related penalty of $55,590.20. The issue to be

decided is whether petitioner must recognize discharge of

indebtedness income in 2000 with respect to a loan on which

petitioner defaulted. Unless otherwise indicated, all section
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1The record does not reveal the separate amount or value of

the CareMatrix stock or the value of the PhyMatrix stock at the

time of receipt by petitioner.

2Petitioner appears to have taken an aggregate basis in the

stock of both CareMatrix and PhyMatrix equal to the aggregate

$1,675,000 value of these stocks at the time of receipt.

references are to the Internal Revenue Code, as amended, and all

Rule references are to the Tax Court Rules of Practice and

Procedure. 

Background

The parties submitted the instant case fully stipulated,

without trial, pursuant to Rule 122. The parties’ stipulations

of fact are hereby incorporated by reference and are found as

facts in the instant case. At the time of filing the petition,

petitioner resided in Glastonbury, Connecticut.

During 1996, petitioner received stock of PhyMatrix

Corporation (PhyMatrix) and CareMatrix Corporation (CareMatrix)

which had an aggregate value of $1,675,000 at the time of

receipt.1 Petitioner incurred a Federal income tax liability of

$621,980 related to the receipt of the stock.2 Petitioner

borrowed from CareMatrix an amount equal to the Federal income

tax liability (the loan), pledging 57,248 shares of PhyMatrix

common stock (the collateral) as security for the loan. The loan

and the pledge of the collateral are hereinafter collectively

referred to as the loan transaction. 
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On April 15, 1997, to complete the loan transaction,

petitioner executed the following three documents: (1) A

promissory note (the promissory note), (2) a stock pledge

agreement (the stock pledge agreement), and (3) a stock transfer

power (the stock transfer power). The promissory note, stock

pledge agreement, and stock transfer power are sometimes

hereinafter referred to as the loan documents. The promissory

note provided that the principal and interest were due and

payable on the earlier of either April 15, 2000, or the date of

the registration of any shares of PhyMatrix stock received by

petitioner pursuant to an agreement dated May 3, 1996. The

promissory note further provided that petitioner would secure the

liability underlying the promissory note with the collateral. 

The stock pledge agreement also provided that petitioner was

required to pledge the collateral as security for the liability

underlying the promissory note and set forth the rights and

duties of petitioner and CareMatrix with respect to the

collateral. The stock transfer power provided that petitioner

sold, assigned, and transferred the collateral for value

received. At all relevant times, Abraham D. Gosman (Mr. Gosman)

served as Chief Executive Officer and Chairman of the Board of

CareMatrix and was responsible for the terms of the loan

documents.
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3The parties stipulated the following with respect to the

value of the collateral as of Apr. 15, 1997: “Pursuant to the

Note, the shares pledged had an aggregate market value of 120% of

the principal borrowed - approximately $750,000.00.” As noted

above, petitioner appears to have taken a basis in the CareMatrix

and PhyMatrix stock equal to the value of the PhyMatrix and

CareMatrix stock at the time the stock was received by petitioner

during 1996. However, the record provides no evidence that the

value of the PhyMatrix stock was the same on April 15, 1997 (the

date of the loan transaction) as it was on the date that the

stock was transferred to petitioner during 1996. Because the

value of the collateral may have fluctuated from the date that

petitioner received the PhyMatrix stock until the date that

petitioner pledged the PhyMatrix stock as collateral, the

aforementioned stipulation as to the value of collateral on 

Apr. 15, 1997, is insufficient to establish petitioner’s basis 

in the collateral on that date. Consequently, we are unable to

determine from the record petitioner’s basis in the collateral.

As of April 15, 1997, the collateral had an aggregate market

value of approximately $750,000, which represented 120 percent of

the outstanding principal due on the promissory note.3 At the

request of CareMatrix, petitioner delivered the loan documents to

CareMatrix’s counsel. On or about May 29, 1997, CareMatrix took

possession of the loan documents and the stock certificate for

the collateral from its counsel. 

The promissory note became due and payable on April 15,

2000, at which time the outstanding principal and interest due

was $746,376.52. CareMatrix subsequently demanded payment, but

petitioner refused to pay, alleging that the promissory note was

nonrecourse and that CareMatrix held the collateral. CareMatrix

made no further collection efforts.
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4We note that sec. 4 of the Stock Pledge Agreement appears

to require petitioner to tender the collateral for conversion,

pledge shares of the newly reorganized entity as security on the

loan, and deliver such pledged shares to CareMatrix.

On July 14, 2000, PhyMatrix filed a bankruptcy plan of

reorganization, which became effective on September 21, 2000. 

The plan provided for the conversion of PhyMatrix stock to shares

of the newly reorganized entity. However, the plan required that

any PhyMatrix shares be tendered for conversion by March 20,

2001. The collateral was not timely tendered for conversion.4 

Respondent determined that petitioner’s default on the

promissory note resulted in cancellation of indebtedness income

in the amount of $750,000 and that petitioner should be subject

to an accuracy-related penalty of $55,590.20. 

Discussion

Section 61(a)(12) provides that gross income includes income

from discharge of indebtedness, which generally equals the amount

due on the obligation less the amount of any consideration paid

for the discharge. Babin v. Commissioner, 23 F.3d 1032, 1034

(6th Cir. 1994), affg. T.C. Memo. 1992-673. Section 61(a)(3)

provides that gross income includes gains derived from dealings

in property. Section 1001(a) provides that gain from the sale or

other disposition of property is the excess of the amount

realized over the property’s adjusted basis and that loss from

the sale or other disposition of property is the excess of the
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5Respondent also cites Carlins v. Commissioner, T.C. Memo.

1988-79, which relied on our holding in Cozzi v. Commissioner, 88

T.C. 435 (1987).

6We apply a facts and circumstances analysis to determine if

or when an abandonment occurred. Cozzi v. Commissioner, supra at

446. “The proper test is whether, under the facts and

circumstances, it is clear for all practical purposes that the

taxpayer will not retain the property; an overt act of

abandonment by the taxpayer is not necessary.” L&C Springs

Associates v. Commissioner, 188 F.3d 866, 868 (7th Cir. 1999),

affg. T.C. Memo. 1997-469. 

In 2925 Briarpark v. Commissioner, 163 F.3d 313, 318 (5th

Cir. 1999), affg. T.C. Memo. 1997-298, the Court of Appeals for

the Fifth Circuit stated that sec. 61(a)(3) applies if (1) the

debtor is relieved of the obligation to repay the debt and (2)

the debtor is relieved of title to the collateral. However, the

court did not hold that sec. 61(a)(3) cannot apply in absence of

a formal transfer of title. Consequently, the formal passage of

legal title does not necessarily establish the time of

abandonment. L&C Springs Associates v. Commissioner, supra at

870.

property’s adjusted basis over the amount realized. Relying on

Cozzi v. Commissioner, 88 T.C. 435 (1987),5 respondent contends

that petitioner’s default on the loan results in discharge of

indebtedness income to petitioner pursuant to section 61(a)(12). 

Petitioner contends that the loan default is treated as a sale or

other disposition of the collateral pursuant to sections 61(a)(3)

and 1001(a), rather than a discharge of indebtedness.

The facts and circumstances of the instant case demonstrate

that petitioner abandoned the collateral in 2000.6 CareMatrix

took possession of the loan documents and the stock certificate

during the loan transaction. CareMatrix demanded payment from

petitioner in 2000, but petitioner refused to pay on grounds that
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7Respondent concedes that the loan constitutes bona fide

indebtedness.

8Such a distinction may affect the character of any gain or

loss on the transaction and the availability of certain

exclusions from gross income. See secs. 1221, 108. 

9Sec. 1.1001-2, Income Tax Regs. Discharge of liabilities.--

(a) Inclusion in amount realized. (1) In general.--

Except as provided in paragraph (a)(2) and (3) of this

section, the amount realized from a sale or other

(continued...)

the loan was nonrecourse and that CareMatrix held the collateral. 

CareMatrix took no further action to collect the outstanding

principal and interest on the loan from petitioner. In an

affidavit stipulated by the parties, Mr. Gosman stated that

petitioner and CareMatrix “intended that, in the event of a

default, repayment would be made only from the collateral and no

other source.” Consequently, we conclude that petitioner

abandoned the collateral upon his default. Accordingly, we

consider the Federal income tax consequences of petitioner’s

default on the loan and abandonment of the collateral.

The parties in the instant case dispute whether the loan is

recourse or nonrecourse.7 The regulations under section 1001

distinguish between a debtor’s disposition of collateral in

satisfaction of an underlying nonrecourse liability and a

debtor’s disposition of collateral in satisfaction of an

underlying recourse liability.8 Specifically, section 1.1001-

2(a), Income Tax Regs.,9 provides that the amount realized on the
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9(...continued)

disposition of property includes the amount of

liabilities from which the transferor is discharged as a

result of the sale or disposition.

(2) Discharge of indebtedness.--The amount realized

on a sale or other disposition of property that secures

a recourse liability does not include amounts that are

(or would be if realized and recognized) income from the

discharge of indebtedness under section 61(a)(12). * *

*

10If the amount of the nonrecourse liability exceeds the

value of the property at the time of the transfer, the debtor

realizes gain to the extent that the liability exceeds the

debtor’s basis in the property at the time of transfer. 

Commissioner v. Tufts, 461 U.S. 300, 313 (1983).

sale or other disposition of property generally includes the

amount of liabilities from which the debtor is discharged but

that the amount realized on the disposition of property securing

a recourse liability does not include discharge of indebtedness

income. Consequently, a debtor’s transfer, or abandonment, of

property to a creditor in satisfaction of a nonrecourse liability

is treated as a sale or other disposition of the property, and

any resulting income constitutes gain on the disposition of

property rather than discharge of indebtedness income.10 L&C

Springs Associates v. Commissioner, 188 F.3d 866, 868 (7th Cir.

1999), affg. T.C. Memo. 1997-469. In contrast, a debtor’s

transfer of property to a creditor in satisfaction of a recourse

liability results in gain from the sale or other disposition of

property to the extent that the fair market value of the property
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11Consequently, we need not decide whether the loan is

recourse or nonrecourse.

exceeds its basis and, to the extent that the liability exceeds

the property’s fair market value, discharge of indebtedness

income is realized. Frazier v. Commissioner, 111 T.C. 243, 245

(1998); sec. 1.1001-2(c), Income Tax Regs.

In the instant case, petitioner contends that the loan is

nonrecourse. As to the recourse nature of the loan, respondent

is not of one mind. Respondent’s trial memorandum refers to the

liability on the loan as nonrecourse. Respondent’s opening brief

contends that the Federal income tax result in the instant case

does not depend on whether the loan is recourse or nonrecourse. 

Respondent’s reply brief, however, contends that the loan is

recourse. For the reasons discussed below, we conclude that

petitioner’s abandonment of the collateral did not result in

discharge of indebtedness income to petitioner during

petitioner’s taxable year 2000, regardless of whether the

liability underlying the promissory note is recourse or

nonrecourse.11

As stated above, a debtor’s abandonment of collateral in

satisfaction of a nonrecourse liability is treated for Federal

income tax purposes as a sale of the collateral pursuant to

section 1001(a). L&C Springs Associates v. Commissioner, supra

at 868. Consequently, in the instant case, assuming that the
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loan is nonrecourse, we conclude that any income realized by

petitioner on the abandonment of the collateral in satisfaction

of the loan is properly treated for Federal income tax purposes

as a gain on the sale or other disposition of the collateral

rather than discharge of indebtedness income. Id.; see sec.

1.1001-2(a)(1), Income Tax Regs. Accordingly, we would hold that

petitioner realized no discharge of indebtedness income in 2000

were we to assume that the underlying liability is nonrecourse.

As noted above, respondent’s trial memorandum and opening

brief contend that the default resulted in discharge of

indebtedness income to petitioner in 2000. Respondent’s reply

brief surprisingly contends, for the first time, that petitioner

is alternatively liable for gain in the amount of $750,000,

representing an amount realized of $750,000 and a basis of zero. 

However, respondent does not offer any evidence to support

respondent’s contention of a zero basis, and the record contains

no such evidence. Under such circumstances, respondent is

prohibited from raising such an issue for the first time on

brief. See Smalley v. Commissioner, 116 T.C. 450, 456 (2001). 

Petitioner would be prejudiced were we to consider such an issue. 

Indeed, we note that respondent objected to petitioner’s motion

for leave to supplement the evidentiary record with evidence of

the value and basis of the collateral, filed after respondent’s

new argument in respondent’s reply brief, which motion we denied. 
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12The taxpayers in Cozzi appear to have conceded that

discharge of indebtedness income would result from an abandonment

of the collateral.

Petitioner obviously was surprised by respondent’s raising of a

new issue on brief that required additional evidence to decide.

Moreover, we find respondent’s reliance on Cozzi v.

Commissioner, 88 T.C. 435 (1987), to be misplaced. In Cozzi, the

Commissioner contended that the taxpayers realized discharge of

indebtedness income upon their abandonment of worthless

collateral securing a nonrecourse liability. The taxpayers in

Cozzi contended that they did not realize discharge of

indebtedness income because they did not abandon the collateral

during the year in issue.12 Id. at 446. We held that the facts

and circumstances evidenced an abandonment of worthless

collateral by the taxpayers during the year in issue and that

such an abandonment of worthless collateral securing a

nonrecourse liability established a discharge of the underlying

liability. Id. at 445-448. Cozzi did not involve a dispute of

whether a debtor’s abandonment of collateral should be treated

for Federal income tax purposes as generating income from a sale

or from a discharge of the underlying nonrecourse liability. 

We now turn to an analysis of the Federal income tax

treatment of the loan default and abandonment of the collateral

based upon the assumption that the loan was recourse. In

contrast to a nonrecourse liability, a debtor’s abandonment of
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13Black’s Law Dictionary 1086 (7th ed. 1999) provides the

following definitions of a recourse note and a nonrecourse note:

recourse note. A note that may be satisfied upon

default by pursuing the debtor’s other assets in

addition to the collateral securing the note. Cf.

nonrecourse note.

nonrecourse note. A note that may be satisfied upon

default only by means of the collateral securing the

note, not by the debtor’s other assets. Cf. recourse

note.

14We recognize, and petitioner does not dispute, that the

terms of the loan documents on their face provide for a recourse

liability. Petitioner instead contends that the loan is

nonrecourse based upon two alternative contentions. The first

contention is that the substance rather than the form of the

transaction should govern and that the underlying facts and

circumstances support the conclusion that the loan is

nonrecourse. Alternatively, petitioner contends that the parties

intended for the loan to be nonrecourse, that the parties made a

mutual mistake in executing a promissory note that did not

accurately reflect their intent, and that the terms of the loan

documents should be reformed to accurately reflect such intent. 

Petitioner contends that petitioner “transferred” the collateral

to CareMatrix in satisfaction of a nonrecourse liability, that

the “transfer” of the collateral is properly treated as the sale

(continued...)

collateral securing a recourse liability upon the debtor’s

default on the liability, alone, does not extinguish the

underlying liability. Lockwood v. Commissioner, 94 T.C. 252, 260

(1990). Unlike collateral securing a nonrecourse liability, the

collateral securing a recourse liability does not represent the

only source of repayment.13 In the instant case, the loan

documents provide CareMatrix with the right to enforce

petitioner’s repayment of the loan, irrespective of whether

petitioner abandoned the collateral to CareMatrix.14
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14(...continued)

of the collateral during petitioner’s taxable year 2000, and that

such a sale does not result in discharge of indebtedness income.

Specifically, the promissory note provides that a release of the

collateral by petitioner does not satisfy petitioner’s

obligation.

[The petitioner’s liability] hereunder * * * shall

remain unimpaired, notwithstanding * * * the release 

* * * of all or any part of security * * *.

The promissory note also does not waive the right of CareMatrix

to pursue legal remedies upon nonpayment.

[CareMatrix] shall not, by any act, delay, omission or

otherwise be deemed to waive any of its rights or

remedies hereunder unless such waiver be in writing and

signed by [CareMatrix], and then only to the extent

expressly set forth therein. 

The stock pledge agreement provides that the pledge is to remain

in effect until the loan is paid in full, at which time

CareMatrix is to return the collateral to petitioner.

Termination of Pledge. This Pledge shall remain

in effect until all terms and conditions of the Note

have been satisfied in full and the Indebtedness has

been paid in full whereupon the Lender shall forthwith

assign, transfer and deliver to [petitioner] without

representation, warranty or recourse, against the

appropriate receipts, all the Pledged Shares, if any,

then held by it in pledge hereunder.

Additionally, the period of limitations for CareMatrix to

commence an action to enforce petitioner’s repayment does not 

expire until April 15, 2006. See Mass. Gen. Laws ch. 106, 
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15In the instant case, the promissory note provides: “This

Note shall be governed by and construed in accordance with the

laws of the Commonwealth of Massachusetts, to the maximum extent

the parties may so lawfully agree.” Similarly, the stock pledge

agreement provides: “This Agreement shall in all respects be

construed and interpreted in accordance with and governed by the

laws of the Commonwealth of Massachusetts.” Consequently, the

laws of Massachusetts govern the interests and rights of the

parties with respect to these documents. See Cook v.

Commissioner, 80 T.C. 512, 520 (1983). Mass. Gen. Laws ch. 106, 

sec. 3-118 (2005), provides that an action to enforce payment of

a note must be commenced within 6 years after the due date stated

in the note. As noted above, the promissory note provided for a

due date of Apr. 15, 2000. 

§ 3-118 (1998 & Supp. 2005).15 The foregoing demonstrates that

petitioner’s abandonment of the collateral, assuming the loan was

recourse, did not discharge petitioner from the loan during

petitioner’s taxable year 2000. CareMatrix would have until at

least April 15, 2006, to enforce payment on the loan if it is

recourse. A taxpayer must recognize income from the discharge of

indebtedness where (1) a liability exists at the time of the

alleged discharge and (2) the taxpayer was in fact discharged

from such liability. Babin v. Commissioner, 23 F.3d at 1034;

Waterhouse v. Commissioner, T.C. Memo. 1994-467. In the instant

case, the loan default does not result in discharge of

indebtedness income, assuming the loan was recourse, because

petitioner was never discharged from liability on the loan. 

Accordingly, we hold that petitioner realized no discharge of 

indebtedness income with respect to the loan for petitioner’s

taxable year 2000.
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On the basis of the foregoing, we hold that petitioner did

not realize discharge of indebtedness income with respect to the

loan default and abandonment of the collateral and that

petitioner is not liable for a section 6662 accuracy-related

penalty. We have considered all contentions that the parties

have raised. To the extent not addressed herein, those

contentions are without merit or unnecessary to reach.

To reflect the foregoing,

Decision will be entered for

petitioner.