TAX COURT OPINION

Case: Richard G. & Suzun J. Abbott
Docket Number: 22749-09S
Judge: Gerber
Opinion Type: summary
Filed: 06/29/2010
Pages: 7

UNITED -STATES TAX COURT ' RICHARD G .(cid:127)AND SUZUN J . ABBOTT, . Petitioners v . COMMISSIONER-OF INTERNAL REVENUE,°iResponden t Richard G . andvSuzun J . Abbott, pro sese . ' Richard W . Kennedy , for respondent . GERBER ,- Judge : This case was heard pursuant to th e provisions of'section 7463 of the Internal Revenue Code in'effect when the petition was ' filed .' ' Pursuant tO - section-7463 (b) , th e decision to be entered is not reviewable by any7,other court, an d 'Unless otherwise,indicated,"all section . references are to the Internal Revenue Code in effect for 2007, . the taxable . year in issue . S MD JUN 2 9 2010 this opinion shall .not be treated as precedent for any othe r .Respondent determined a $767 deficiency in petitioners' 2007 , Federal income tax based on three adjustments : (1) Cancellatio n of indebtedness income--$4,753 ; (2) failure to report a State o f Utah tax refund--$216 ; and (3) premature withdrawal of .a pension , along with a section 72(t) 10-percent additional tax . 2 consider whether petitioners had income from cancellation o f indebtedness and a State income tax refund for 2007 . Backgroun d Petitioners resided in Utah at the time their petition wa s filed . Petitioners claimed a $2,759 deduction for Utah Stat e income tax as part of the itemized deductions claimed on Schedul e A, Itemized Deductions, of their 2006 joint Federal income ta x return . Petitioners . paid $800 in 2006 Utah State income tax sometime during 2007 and received a $216 refund of 2006 Uta h State income tax in 2007 . Petitioners did not include the $21 6 in income on their 2007 Federal tax return . Petitioners did no t itemize deductions on their 2007 Federal tax return . Responden t determined, that petitioners must include the $216 in . income fo r their 2007 tax year . , 2Petitioners conceded the premature withdrawal and ..related additional tax adjustment . Petitioner- Si zun . J Abbott (Mrs . Abbott) borrowed money .-from Commonwealth Central Credit Union (Commonwealth)-,a California corporation . On account .of,her poor financial condition Mrs . Abbott stopped making payments on the -loan from Commonwealt h during 2003 when her loan balance- was'$4 ,753 .43 . .Mrs .-Abbott : .r turned her financial . matters over' . to . Homeland Financial Services, Inc . (Homeland) to act on her behalf with respect to resolving, . her debts with various creditors . During 2003 and,2004 Commonwealth placed Mrs . Abbott's loan in delinquent status' and attempted collection . Her loan was placed-in. "defaulted' :status" during 2004 . Commonwealth cancele d .Mrs . Abbott's outstanding debt . -of : .$4' .,753 . . 43,.during 2007 an d issued her a Form'1099-C ., Cancellation ofDebt,,reflecting candellation of debt' 'in°"that amount . °' It was , .Commonwealth' s approach to' extinguish or cancel debt when no payment, was received for 3 years and thelobligation was no longer collectible Petitioners did not-report-the$4,753 .43-in incom e on theii 2007 tax return . :Respondent determined that the .$4,753 .43 was income, from cancellation of indebtedness .for petitioners' 2007,-tax yea r .'Discussion .. yInitially, we-address'petitioners'"contention-that th e burden of proof should-.be shifted to'respondent_under section 7491 :'- .Respondent contends that petitioners did-,not-comply with the prerequisites of section 7491 and that the burden did not shift . .Section 7491(a) shifts the burden to the Commissioner wher e taxpayers can show that-they complied .with substantiation . requirements, maintained required records, and generally cooperated with the Commissioner . Petitioners did not provid e documents or substantiation to respondent or the Court-in-support of their positions . . Because those : requirements were not met, the burden remains on petitioners to show, that respondent erred in, the determination of the 2007 . income tax deficiency . . . Petitioners contend that,they are not required to include .in income on their 2007 Federal tax return the $216 . Utah State income tax refund received in 2007 . Petitioners refer the Court to material concerning the "tax benefit rule" and respondent's instructions and forms for computing the amount of State tax refund includable in income ° Respondent agrees that the tax benefit rule applies, but contends that under that rule petitioners are required to . .include the $216 in . their 2001 7 .a . income . The tax benefit rule provides that, if an,amount is . deducted' from income in one year and a part or all of the amount is recovered in a later . year, then the recovery-is treated as .incom e in the . year received to the extent the deduction reduced the amount of'tax imposed . Sec . 111(a) ; Francisco v . Commissioner ,',- - 5 - 1119 T .C . 317, 333-334 (2002) affd . 370 :F .3d :1228 (D .C . (cid:127)Cir . 2004) ; Kadun.c v . Commissioner , T .C . Memo . '1997-92 ;'see Hillsboro Natl .' Bank v : ., .Commissioner 460 .U .S;, 370, 377.' (1983) ._ Becaus e petitioners deducted. Utah State incomeytax on their 2006 Federal . return, the $216 refund'ofUtah,State tax received in 2007 i s includable, in income oh-their 2007'=Federal tax return . Petitioners make,two arguments . First, :theylargue that the- $216 refund should be includable only if'they claimed 'a deduction- for Utah State income-tax during or for 2007 ;: which . they did not . Second, they argue that payment of $800 of their 2006 Utah State income tax and,.the'receipt of the refund both occurred in th e .same year--2007 .-"Both of petitioners' arguments concern 'the- matching . of the deductions and income in thesame accounting,- -period .- That, however, is not how the-tax benefit rule works . . ..' Because petitioners received a benefit .by deducting Utah. State income' tax'on'their 2006 Federal 'tax return, ,petitioners must- include 'any ,refund ' (for which they -had received a prior, year benefit) of -the Utah State "income' tax . received during 2007 in income on their 2007 Federal tax return irrespective-of whether they claimed a Utah-Stateincome'tax deduction on their-2007--. Federal return : 'Adcordingly,-we hold that petitioners shoul d have included the $216 Utah State -income tax 'refund in income o n their 2007 Federal :return . 6 Cancellation . or discharge of indebtedness results i n includable income in the year of the cancellation . Sec ._ 61(a)(12) ; United States v . Kirby Lumber Co . , 284 U .S . 1 (1931) . . Section 108 provides for . certain circumstances where income from .. the cancellation of indebtedness,may~be excluded from_,gros s income . Petitioners . argue that the debt here was effectively canceled during 2003 or 2004 and not during 2007 . They'also contend that . Homeland had consolidated Mrs . Abbott's debt and reached some agreement with Commonwealth before .2007 . . . Petitioners-do not rely on the provisions of section 108 . Commonwealth canceled Mrs . Abbott's debt in 2007, 3 years after she stopped making payments and the obligation was classified as,in default . Respondent contends that petitioners failed to offer any independent evidence showing that . the Commonwealth debt .was settled or written off before 2007 . Respondent also argues that . Commonwealth's approach to writin g off debt after,3 years is in accordwith California State law . Commonwealth was a California corporation, and-the lawo f that State . provides that suit to enforce a written obligation must be commenced within 4 years of the default . Cal . Civ . Proc . .Code sec .' 337 (West 2006) . Further, where a debt is payable in, monthly installments, the period of limitations on enforce d collection begins . to run on each installment from the time actio n could have been instituted . Bissell v . Forbes , 82 P . 698 (Cal . 7 - Ct . App . 1905 ) . Commonwealth's actions in this case are in .accord with the above - referenced statutory provision and case precedent . Petitioners' argument that Homeland resolved the Commonwealth obligation before 2007 fails for lack of credible evidence supporting their contention . The record shows that Commonwealth issued a Form 1099 - C and did not extinguish or cancel the indebtedness before 2007 . Accordingly , petitioners were obligated to report the income from cancellation of indebtedness . To reflect the foregoing, Decision will be entere d for respondent .