1Unless otherwise indicated, section references hereafter

are to the Internal Revenue Code in effect for the year at issue.

T.C. Summary Opinion 2006-43

UNITED STATES TAX COURT

HENRY B. AND ANGELA E. DAVIS MARTINS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24166-04S. Filed March 22, 2006.

Henry B. Martins, pro se.

Bryan E. Sladek, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.

Respondent determined a deficiency of $1,028 in petitioners’

Federal income tax for 2002.
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The sole issue for decision is whether petitioners realized

discharge of indebtedness income under section 61(a)(12) and, if

so, the extent thereof under section 108(a).

Some of the facts were stipulated. Those facts and the

accompanying exhibits are so found and are incorporated herein by

reference. Petitioners’ legal residence at the time the petition

was filed was Detroit, Michigan.

Henry B. Martins (petitioner) was an engineer for the Ford

Motor Co., an automobile manufacturer, during the year at issue. 

Petitioner was also engaged in a separate activity wherein he

arranged the purchase and sale of goods from overseas sources to

customers in the United States. The goods he dealt with were

generally electronic equipment, food service equipment, and other

equipment for which there was a demand and the availability of an

overseas source for its acquisition. Petitioner’s practice was

to purchase the equipment and, upon delivery to the customer,

collect the selling price. His purchases were all financed

through his American Express credit card. At some point,

petitioner was faced with a problem in collecting payments on

equipment he had delivered. As a result, he was unable to pay

his account with American Express and was classified as

delinquent. As of July 17, 2002, petitioner owed American

Express $24,831.38. Petitioner made several payments in the

ensuing months that reduced his indebtedness to $21,831.38. At
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that point, it appears that American Express felt that further

collection actions would no longer be pursued, and a payment

agreement was worked out with petitioner through the efforts of a

collection agency employed by American Express. Petitioner paid

$15,000, and American Express relieved and released petitioner of

the balance due of $6,831.38. For the year 2002, American

Express issued Form 1099-C, Cancellation of Debt, for the

$6,831.38. Petitioners did not include the $6,831.38 as gross

income on their 2002 Federal income tax return. In the notice of

deficiency, the sole determination is that the $6,831.38

constitutes gross income.

From the record, it appears that the settlement between

petitioner and American Express came about by referral of the

account by American Express to a collection agency. Through the

efforts of the collection agency’s contacts with petitioner, the

settlement agreement was reached. After the $15,000 payment,

petitioner was of the impression, as he testified, that

“everything was over”, and contends he never received the Form

1099-C issued by American Express.

At trial, petitioner argued that the $21,831.38 was not the

correct amount of his indebtedness because it included erroneous

delinquency charges of $2,646.19; additionally, he had accrued

membership rewards points on his credit card, and that together,

the erroneous delinquency charges and the value of the membership
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2Where the nature and amount of an indebtedness are

contested in a good faith dispute, and a compromise settlement is

reached, the excess of the stated principal amount of the claimed

debt over the amount for which the liability is settled does not

constitute discharge of indebtedness income. Preslar v.

Commissioner, T.C. Memo. 1996-543, revd. 167 F.3d 1323 (10th Cir.

1999) (citing United States v. Hall, 307 F.2d 238 (10th Cir.

1962)). There is no evidence that the $15,000 payment by

petitioner was a “settlement” or a compromise of the

indebtedness. Petitioner presented no evidence to show that the

delinquency charges were invalid. Moreover, it appears that,

from the terms of the American Express monthly statements,

petitioner’s membership rewards points also had no value because

the points were good only so long as the account was in good

standing. Since petitioner was in default on his account, he was

not in good standing, and there is no evidence he reinstated the

points by payment of a service fee as provided in the statement.

rewards offset the $6,831.38 income at issue. However, there is

no evidence that any compromise or settlement agreement was

entered into between petitioner and the collection agency

representing American Express. The agreement simply was that

petitioner would pay $15,000 in cash, and the remaining $6,831.38

would be forgiven.2

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 that is

later discharged or released has realized an accession to income. 

Id.; 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
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that the discharge of a debt affects the freeing of assets

previously offset by the liability. Jelle v. Commissioner, 116

T.C. 63, 67 (2001) (citing United States v. Kirby Lumber Co.,

supra).

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, an obligation to repay a loan is

settled for less than the amount of the loan, one ordinarily

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. A taxpayer may exclude

from gross income a discharge from indebtedness if the discharge

occurs in a bankruptcy case or, alternatively, when the taxpayer

is insolvent, or if the indebtedness is a qualified farm or
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business real estate debt. Sec. 108(a)(1)(A)-(D). None of these

exclusions apply in this case.

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

American Express 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. Vaughn v.

Commissioner, T.C. Memo. 1992-317, affd. without published

opinion 15 F.3d 1095 (9th Cir. 1993).

The Court concludes that petitioner realized discharge of

indebtedness income in the amount determined in the notice of

deficiency. Respondent, therefore, is sustained.

Reviewed and adopted as the report of the Small Tax Case

Division.

 Decision will be entered

 for respondent.