TAX COURT OPINION

Case: Judy A. Scharing & Michael G. Scharing
Docket Number: 18075-13S
Judge: Kerrigan
Opinion Type: bench
Filed: 09/26/2014
Pages: 6

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 JUDY A. SCHARING & MICHAEL G. SCHARING, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) Docket No. ) ) ) ) 18075-13S. ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and respondent a copy of the pages of the transcript of trial in the above case before Judge Kathleen Kerrigan at San Francisco, California, on September 8, 2014, containing her oral findings of fact and opinion rendered at the conclusion of the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. September 26, 2014 SERVED Sep 26 2014 Capital Reporting Company Bench Opinion by Judge Kathleen Kerrigan September 10, 2014 Judy A. Scharing & Michael G. Scharing v.Commissioner Docket No. 18075-13S 3 THE COURT: The Court has decided to render in this case the following as its oral findings of fact and opinion which shall not be relied upon as precedent in any other case. This proceeding was heard as a small tax case pursuant to the provisions of section 7463 of Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice & Procedure. This bench opinion is made pursuant to the authority granted by secti'on 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice & Procedure. Unless otherwise indicated, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 all section references are to the Internal Revenue 19 20 21 22 23 24 Code in effect for the year in issue, and all ule references are to the Tax Court Rules of Practice & Procedure. By notice of deficiency dated July 25th, 2013, Respondent determined a deficiency of $1,153 for tax year 2011. Petitioners conceded that 25 Petitioner husband received $99 of unreported taxable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 wage income for tax year 2011. The remaining issue for our consideration is whether the cancellation of debt of $ 396 is income for tax year 2011. KK- Trial of this case was conducted on September 8th, 2014, in San Francisco, California. 6 Only Petitioner husband was present during the trial 7 8 9 10 11 and he represented himself. Petitioner wife signed the stipulation of facts. Connor J. Moran represented Respondent. The parties' stipulation of facts and exhibits were admitted into evidence. Only 12 Petitioner husband testified. 13 14 15 16 We find the following facts. FINDINGS Petitioners resided in California when they filed the petition. Petitioner husband was the 17 manager of Hydronika, Inc. which ceased operations in 2010. In 2011 Barclays bank issued a form 1099-C, ancellation of ebt, to Petitioner husband, showing kNL a cancelled debt of $3396. The credit card for which c the debt was cancelled was in Petitioner husband's name. Petitioner did not report this cancellation of debt on their 2011 tax return. 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company OPINION Generally, the Commissioner's 5 determinations in the notice of deficiency are presumed correct and the taxpayer bears the burden of proving those determinations are incorrect. Rule 142(a); Welch v. Helvering, 290 0,S,111, 115 (1933). l© Petitioners do not contend that the burden of proof should be shifted to respondent under section 7491(a) and the record did not suggest any basis for a shift. Petitioners did not raise section 6201(d) and respondent produced reasonable information concerning such deficiency in addition to the information return. Generally;a taxpayer must include income from discharg indebtedness. See sec,t-i-en- 61(a)(12); sect-iod(1./61 12(a), Income Tax Regs. A Where indebtedness is being discharged, the resulting income would equal the difference between the amount due on obligation and the amount paid, if any, for the discharge. See, e.c., Cronin v. g_g. Commissioner, T,p,Memo.1999-22. F¥- This principle derives from the case of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 United States v. Kirby Lumber Company, 284 US, 1 ¾¾ (1931). 24 25 A debt cancellation results in accession to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 wealth by effecting a freeing of assets previously 2 offset by a liability arising from the indebtedness. 3 United States v. Kirby Lumber, supra at 3; Cozzi v. /' 4 5 6 7 8 9 10 11 Commissioner, 88 T,C,435, 445 (1987). T-\ A AA The income is recognized in the year cancellation occurs. Montgomery v. Commissioner, 65 TC, 511, 520 (1975). r ^ Income from the discharge of indebtedness is excluded from gross income in certain instances. These instances include when the discharge occurs in a Title 11 bankruptcy proceeding, or the discharge / 12 occurs when the taxpayer is insolvent. See sect--i-eedl Y-t. 13 14 15 16 108(a)(1)(A) and (B). A Petitioner husband testified that the debt discharge was for the credit card issued in his name but for t8expenses fer the company oÑ îdt which he was \< 17 manager, Hydronika, Inc. Petitioner husband further 18 19 20 testified that the company folded in 2010 and he did not have an agreement with the Hytdronika, Inc., regarding who would be liable for payments if 21 Hydronika, Inc., did not make a payment. 22 23 24 25 Petitioner husband did not contend that he was bankrupt or insol.vent. He testified that Hydronika, Inc., did not declare bankruptcy. The exceptions provided in section 108(a)(1) do not apply 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 to this case. Therefore, the $3,396 of discharged debt is taxable income. We sustain the deficiency as determined by Respondent and a decision will be entered for Respondent. This concludes the Court's oral findings of facts and opinion in this case. (Whereupon, at 9:14 a.m., the bench opinion in the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com