1Unless otherwise indicated, all 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.

 

 T.C. Summary Opinion 2009-121

UNITED STATES TAX COURT

STEED A. AND SHONNA K. MARTIN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9431-08S. Filed August 4, 2009.

Steed A. and Shonna K. Martin, pro sese.

Thomas R. Mackinson and Sharyn Lais, for respondent.

GERBER, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1 Pursuant to section 7463(b), the
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decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.

Respondent determined a $1,197 income tax deficiency for

petitioners’ 2005 tax year. The sole issue before the Court is

whether petitioners were required to include $6,704 in income due

to cancellation of indebtedness.

Background

Petitioners resided in California at the time their petition

was filed. On June 21, 1999, Steed A. Martin (petitioner)

purchased a 1988 Toyota 4-Runner automobile. He financed the

automobile through Heritage Community Credit Union (Heritage) by

entering into a “Simple Interest Motor Vehicle Contract and

Security Agreement” indicating that the price was $12,360.48, of

which $8,872.34 was being financed with Heritage. Petitioner

stopped making payments on his loan with Heritage during 2001,

and Heritage “charged-off” and “canceled” the $6,704.92

outstanding principal of petitioner’s loan. 

Petitioner was notified by Heritage in 2002 that his

automobile was going to be repossessed, and soon thereafter a

person came to his residence to repossess the automobile. 

Petitioner turned over the keys for the automobile, and it was

placed on a truck and transported from the vicinity of

petitioner’s residence. Petitioner did not subsequently see or
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have access to the automobile. During 2005 Heritage issued a

Form 1099-C, Cancellation of Debt, to petitioner reflecting the

cancellation of petitioner’s debt of $6,704.92. That information

was also communicated to the Internal Revenue Service. 

Petitioners did not report the $6,704.92 in income for 2005, and

respondent made an adjustment for increased income due to

cancellation of indebtedness. The records of Heritage reflect

that petitioner’s automobile was assigned for repossession. 

Petitioner is of the opinion that the value of the

automobile at the time of the repossession was approximately

$6,704.92, equivalent to the outstanding loan principal with

Heritage. 

Discussion

The record shows that petitioner purchased an automobile and

financed the purchase with Heritage. At some point he stopped

making payments on the loan and was advised that the automobile

would be repossessed. The automobile, which petitioner opined

had a value equal to the outstanding principal on the loan, was

taken from petitioner during 2002. Heritage had charged off the

loan in 2001, but it sent petitioner a Form 1099-C reflecting

cancellation of indebtedness income in the amount of the

outstanding balance of the loan during 2005.
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The only evidence in the record that supports respondent’s

determination of cancellation of indebtedness income is the Form

1099-C Heritage issued. 

In general, the Commissioner’s determination in a notice of

deficiency carries a presumption of correctness, and the burden

is on taxpayers to prove otherwise. Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Under circumstances

prescribed by statute the burden may shift where a taxpayer

introduces credible evidence with respect to any factual issue

relevant to ascertaining the income tax liability of the

taxpayer. Sec. 7491(a)(1). Additionally, section 6201(d)

provides that in any court proceeding, where a taxpayer asserts a

reasonable dispute with respect to any item of income reported on

an information return, such as a Form 1099 filed by a third

party, the Commissioner may have the burden of producing

reasonable and probative information concerning the deficiency in

addition to information on the information return. 

Petitioners dispute the correctness of the information

return. Petitioner testified that the automobile was repossessed

by Heritage at a time when it had a value equal to the

outstanding debt. That would mean that Heritage had received an

asset with sufficient value to substantially reduce or eliminate

the outstanding debt and would call in question whether the Form

1099-C was correct. Heritage’s business records offered by
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2The letter contained multiple levels of hearsay, was not a

business record, and contained subjective opinions of the

Heritage employee, who was not in court for its introduction

and/or cross-examination as to the matters stated therein. 

3Respondent raised no question as to whether petitioner

complied with any other requirement or aspect of sec. 6201.

respondent reflect that petitioner’s automobile had been assigned

for repossession, a fact that supports petitioner’s testimony to

that effect. At trial respondent attempted to place in evidence

a March 25, 2009, letter from a Heritage employee which contained

information about the automobile. The document (which had been

marked as Exhibit 5-R for identification) could not be received

in evidence.2

Accordingly, we are left with a record where petitioners

have effectively called into question the validity of the Form

1099-C and respondent has not placed in evidence any information

that would rebut petitioner’s testimony, which is also supported

by documentary evidence in the record. Therefore, in accord with

section 6201(d), respondent is not able to rely solely upon the

Form 1099-C in support of the determination that petitioners have

cancellation of indebtedness income.3

Generally, a taxpayer must include income from the discharge

of indebtedness. See sec. 61(a)(12); sec. 1.61-12(a), Income Tax

Regs. Where indebtedness is being discharged, the resulting

income would equal the difference between the amount due on the

obligation and the amount paid, if any, for the discharge. See,
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4Petitioners do not argue that any of the exclusions of sec.

108(a) apply to reduce any cancellation of indebtedness income

that may be redetermined.

e.g., Cronin v. Commissioner, T.C. Memo. 1999-22. This principle

derives from the seminal case of United States v. Kirby Lumber

Co., 284 U.S. 1 (1931), where the Supreme Court held that a

taxpayer may realize income by paying an obligation at less than

its face value. 

Accordingly, income from cancellation of indebtedness would

not include the entire amount of the outstanding debt if the

creditor received payment or assets of value from the debtor. A

cancellation of indebtedness generally produces income to the

debtor equal to the difference between the amount due on the

obligation and the amount paid for the discharge. If, however,

no consideration is paid to or received by the creditor for the

discharge, then the entire amount of the debt is considered

income to the debtor. Sec. 61(a)(12).4

We accept petitioner’s testimony on the value of the

automobile, as an owner is presumed to know or have a good sense

of the value of his property. There is no evidence in the record

that is contrary to petitioner’s testimony. In addition,

petitioner purchased the automobile during 1999 for $12,360.48. 

Two years later, when it was repossessed, a value of $6,704 would

appear to be reasonable (one-half of its original value). 
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Petitioner testified that the automobile was operational at the

time it was repossessed. 

Under these circumstances, the Form 1099-C has been refuted

and discredited. Petitioners have shown that the debt was

satisfied, and we accordingly hold that petitioners were not

required to report cancellation of indebtedness income for 2005. 

Because respondent made no other adjustments or determinations, 

Decision will be entered

for petitioners.