TAX COURT OPINION

Case: Angela Bibb-Merritt
Docket Number: 13208-07S
Judge: Panuthos
Opinion Type: summary
Filed: 05/18/2009
Pages: 7

-T . C . Summary Opinion 2009-78 UNITED STATES TAX'COUR T ANGELA BIBB-MERRITT, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 13208-0 .7S . Angela Bibb-Merritt, pro se . . Brooke S . Laurie , for respondent . I } PANUTHOS, Chief Special Trial-Ju 44 dcre : This case was heard E N pursuant to the provisions of section 7463 of the Interna l Revenue Code in effect when the petition was filed ..' Pursuanti o section 7463(b)., the decision to be entered is not reviewable', , 1 Unless otherwise in L icated, 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 an d Procedure . I any other court, and this opinion shall not be treated a s precedent for any other case . ,Respondent determined a deficiency of $4,487 in petitioner' s 2005 Federal income tax . s i e issues for decision are: (1) Whether petitioner i s u entitled to exclude from income some or all of her credit car d debt".ghat was discharged in 2005 ; and (2) whether petitione r i s entitled to a deduction for payments to a .debt negotiatio n Background !u Some of :the facts have been stipulated, and we incorporat e the stipulation and accompanying exhibits by this reference . . Petitioner- lived, in California when she filed the petition . Petitioner worked full time as a letter carrier for the U .S . Postal'Service . Petitioner started a business in 1996 . :: Petitioner purchased Afrocentric dolls, doll stands, dol l clothing, and doll jewelry to sell . Her business failed sometim e Petitioner accumulated over $112000in credit card debt . She incurred some of the-debt for the .; purchase of inventory an d other business expenses . She incurred most of the debt betwee n 1999 :and 2001 . ;Petitioner hired Freedom Debt Relief (FDR) to assist her i n negotiating with her creditors .' In 2005 FDR arranged for some of petitioner's creditors t o ccept . .reduced payments and cancel, som e of petitioner's debt .. Petitioner timely filed her i 005 .Form 1040, U .S . Individua l Income Tax,Return ., reporting $10, :888 I- in discharge of indebted es s h income (sometime hereafter referred to as- DOI) and .claiming tw o related deductions : (1) $ 11 0,888 representing the exclusion o the DOI from income on -Ehe basis of insolvency and (2) . $9,617; a s an amount paid to FDR to negotiate with her creditors . The' ; entries for these ,deductios on -petit'ioner' s Schedule }A, Itemize d Deductions, include "See S tatemen }// but-the copy-of petitiorpr return in the record does not incc lude . these "statements . b Petitioner's 2005 return a, lso inc lud;es a. Schedule ~C ; Profi- t Loss From Business, but this schedule reports only zeros ; 1 .,4 . it does not .report any busines s ~ncome or any business expenses, for 2005 . The Internal Revenue Service (11 RS) issued a-notice o deficiency disallowing.'both DOI related deductions listed abo+'ve' . IJ 4 Petitioner filed a timelypeti~ion and testified at .tria l 2 Upon an initial- review of jtheErecord,the Court observed that the facts relating to petitioner's claim of insolvency ; were quite limited . In an attempt to afford petitioner ever y .opportunity to provide a complete record on this issue, the'Cou t ;. , . _ directed the parties to confer for the purpose of supplementin g the record . Petitioner was unresponsive to invitations from'"the Court, her-own representative, .ai1id .tespondent's .,counsel, to present additional information . efforts to encourage . petitioner to make a complete factual ;', {~ record and petitioner's lack of response, the Court has-no choice but . to consider this matter on the existing incomplete record Given the Court's extraordinaC I .H 4 - Discussion ? ° ,In general, the Commissioner's determination set forth in a notice of deficiency is presumed correct, and the taxpayer bear s the burden of proving that the determination is in error . Rule 142 ), ;, Welch v . Helvering , 290 U .S . 111, 115 (1933) . Pursuant to section 7491(a), the burden of proof as to factual matters shifts ; to the Commissioner under certain circumstances . Petitioner has neither alleged that section 7491(a) applies nor established her compliance with its requirements . Petitione r therefore bears the burden of proof . 1 . Discharge of Indebtedness Exclusio n Gross income is broadly defined and includes income ;~from a discharge of indebtedness . Sec . 61(a)(12) . However, section 108(a)(1')(B) allows a taxpayer to exclude DOI from income if a . debt cancellation occurs when the taxpayer is insolvent . A taxpayer .'s "indebtedness" is defined as debt for which the taxpayer is liable . Sec . 108(d)(1)(A) . The insolvency exclusion is limited to the amount of the taxpayer's insolvency . Sec . 108(a)(3) . Finally, "insolvency" is defined as the excess of th e taxpayer's liabilities over the fair market value of th e taxpayer's assets and is determined immediately before th e discharge . Sec . 108 ( d)(3) ; Merkel v . Commissioner , 109 T . C . 463, 472-473 (1997 ), affd . 192 F . 3d 844 ( 9th Cir . 1999 ) ; Miller v . Commissioner , T .C . Memo. 2006-125 . To document herliabilities and cancellation o f indebtedness, petitioner introduced : (1)'A handwritten summar y of her credit card debts a s of the end of 2005,_ totaling , $112,420 .47 ; (2) an undated it was working,' listing a summary trom FDR of the debt 'accounts r , :, t I ~,133 ;931 .53 .in debts , ,Iwit h1. 1 l ~'~ some identified,-as "settled and several, of those 'identified b y petitioner's handwritten notes as having been settled in . 2.005; and (3) copies of,,fou .r e-mail mes1sages documenting debt forgiveness negotiated by FDR in 2005 . 4 ,Petitioner testifie d that s h e was insolvent in 2005 whe n these debts were canceled . The C our t advised petitioner that, 'consideration of whether s;he .wa s ins olvent required a .review o her assets and liabilities, 'at the ti me :of the discharge . .Petitioner provided some ilnformatiion about her debts in 2005 , a s described above, but she did not int roduce documentary evidenc e or testimony sufficient ;to determine the fair market -valueTofheir assets . The record does not demonstrate that petitioner wa s insolvent before the debt cancellation . Thus, .petitioner faile d to prove that she was insolvent at he time the debt wa s 3 Although the document is undaited, the last entry on thi s summary appears to be dated August 2006 . The total discharge' Of indebtedness indicated 'by thes e e-mails is,$8,294 . 62 . Ho~ever , thetparties do not dispute that{ , petitioner received $10,888 in debtlcancellation in 2005 . ~ „ - 6 - canceled . As a result, petitioner may,inot .exclude the incom e from discharge of indebtedness ., Sec . 108(d)(3) . 2 . Payments to FD R Petitioner testified that FDR required her to establish a separate bank account and to deposit funds into that account . She explained that FDR withdrew its fees and expenses from that account, together with payments of negotiated amounts to petitioner's creditors . Petitioner did not provide a copy of an . agreement with,FDR, indicate the exact ;inature of the claimed payments to FDR, or introduce any evidence to support her claim that she : paid FDR $9,617 in 2005 to obtain $10,888 in debt cancellation . 5 Petitioner failed to establish that the claimed expenditure of $9,617 is properly deductible, nor did she establish that the amount was actually paid .' Respondent''s determination i s sustained . See Higbee v . Commissioner , 116 T .C . 438 (2001) . 5 As noted, petitioner's 2005 Schedule A references a statement on line 22 where she claimed the $9,617 as ."Other expenses" . However, the record does not include any statement that itemizes or describes that deduction of those payments . II While the rule of Cohan v . Commissioner , 39 F .2d 540 (2d Cir . 19,30), permits the Court to estimate the deductible amount of a taxpayer's expense if she is unable to substantiate the precise ...amount, we can make such an estimate only if the,, taxpayer provides4some reasonable evidentiary basis for estimating the expenses . Vanicek v . . Commissioner , 85 T .C . 731, 742-743 (1985) . We have considered all arguments made, and, to the exten t not mentioned,-we conclud e are moot, irrelevant, or' without merit .