TAX COURT OPINION

Case: Charles William & Charlotte Ann Ewing
Docket Number: 22485-11S
Judge: Guy
Opinion Type: bench
Filed: 07/03/2013
Pages: 10

CMS UNITED STATES TAX COURT WASHINGTON, DC 20217 CHARLES WILLIAM & CHARLOTTE ANN EWING, Petitioners, V. COMMISSIONER OF INTERNAL REVENUE, ) ) ) ) ) ) Docket No. 22485-11S. ) ) ) Respondent OR D E R 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 to respondent a copy of the pages of the transcript of the trial in the abovecaptioned case before Special Trial Judge Daniel A. Guy, Jr., at Columbus, Ohio, on June 19, 2013, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for petitioners. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. July 3, 2013 SERVED Jul 03 2013 Capital Reporting Company Bench Opinion by Special Trial Judge Daniel A. Guy, 3 Jr. June 19, 2013 1 2 3 4 Charles William & Charlotte Ann Ewing v. Commissioner 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Docket No. 22485-11S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of a deficiency.is a small tax case conducted pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. 22 Hereinafter in this bench opinion, section references 23 24 25 are to the Internal Revenue Code of 1986, as amended, in effect for 2008, and Rule references are to the Tax Court Rules of Practice and Procedure. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 Petitioners, husband and wife, resided in 2 Ohio at the time the petition was filed, and they 3 4 appeared at trial pro se. Anita A. Gill appeared on behalf of respondent. The parties filed with the 5 Court a stipulation of facts, with accompanying 6 7 8 9 10 11 exhibits, that are incorporated herein by this reference. The issue for decision is whether petitioners failed to report discharge of indebtedness income for the taxable year 2008. Mr. Ewing was issued a credit card by 12 Citibank in 1991. He used the credit card 13 14 15 16 17 18 19 20 21 occasionally and always paid the balance due in full each month. In the fall of 2002, Mr. Ewing received an offer from Citibank to borrow funds and pay low interest charges of 3.9% on the borrowed amounts. The "fine print" at the bottom of the offer stated in relevant part: "However, if you default under any Card Agreement that you have with us, we may immediately increase the Annual Percentage Rate on 22 all balances (including any promotional balances) to 23 24 25 a variable default rate of 24 . 74% . " Mr . Ewing testified that he accepted this offer, and another like it promising an interest rate of 5.9%, before 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 the end of 2002. Mr. Ewing testified that Citibank sent him two blank checks which he filled out and negotiated in the amounts of $5,500 and $4,900, respectively. Mr. Ewing testified that he had trouble 6 making electronic payments on Citibank's Web site and 7 8 that in January 2003 he contested an erroneous charge to the account. It appears that Citibank considered 9 Mr. Ewing to be in default under his Card Agreement 10 11 12 because shortly thereafter Mr. Ewing received communications from Citibank indicating that the interest rate on the funds he had recently borrowed 13 would increase to approximately 24%. Mr. Ewing 14 15 16 17 18 testified that he immediately notified Citibank that the proposed change in the interest rate was unacceptable. Between late 2002 and the middle of 2006, Mr. Ewing made monthly payments on his credit card account, purportedly under protest, equal to the 19 minimum amount that Citibank indicated was due. 20 During this period, Mr. Ewing maintained a schedule 21 designed to show the declining balance due on his 22 Citibank account assuming interest rates of 3.9% and 23 24 25 5.9% on the borrowed funds. Mr. Ewing's records reflect that, as of July 16, 2006, he had made payments to Citibank totaling $9,647.40 and that the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 balance due on his Citibank account was approximately $2,400. Citibank, on the other hand, applying an interest rate of 24%, maintained that Mr. Ewing owed approximately $10,000 on the account at that time. During the summer of 2006, Citibank refused to accept Mr. Ewing's monthly payments and turned his account over to the collection department. Mr. Ewing testified that he received numerous calls demanding payment. In April 2007, Citibank filed suit against 10 Mr. Ewing in Franklin County Municipal Court in Ohio 11 to collect amounts purportedly due on the account. 12 Mr. Ewing filed a counterclaim against Citibank 13 14 15 16 17 18 19 20 21 22 23 24 25 alleging, inter alia, that Citibank had attempted to change the interest rate on the account and engaged in fraudulent conduct. On April 17, 2008, Citibank and Mr. Ewing executed a Settlement Agreement and Release (settlement agreement). The settlement agreement provided in pertinent part that Mr. Ewing would pay $2,400 to Citibank and both parties would execute a stipulated order of dismissal of the lawsuit dismissing their respective claims with prejudice. The settlement agreement stated that neither party admitted liability to the other party. Finally, the settlement agreement stated that "Debtor understands 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 that Creditor or its affiliates may issue tax forms, including a 1099 Form, regarding the Account or amounts written off on the Account." The parties complied with the essential terms of the settlement agreement, and the lawsuit was dismissed in June 2008. Citibank subsequently issued to Mr. Ewing a Form 1099-C, Cancellation of Debt, indicating that debt of $5,532.05 had been cancelled on April 1, 2008. The $5,532.05 represented the principal amount of Mr. Ewing's loans that Citibank considered to have been cancelled. Petitioners filed a joint Federal income tax return for 2008 reporting total income of $25,741. Petitioners did not report the $5,532.05 of cancellation of indebtedness income that Citibank reported on Form 1099-C. Respondent issued a notice of deficiency to petitioners for 2008 determining an income tax deficiency of $655. The deficiency is attributable to respondent's determination that petitioners were obliged to include $5,532.05 of cancellation of indebtedness income in their taxable income for 2008. 24 Petitioners timely filed a petition for 25 redetermination with the Court pursuant to sect·ion 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6213(a). We begin with the fundamental principle of Federal tax litigation that the Commissioner's determinations normally are presumed correct. See INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992); 6 Welch v. Helvering, 290 U.S. 111, 115 (1933). 7 8 9 10 11 12 Section 61(a) (12) provides that gross income includes income from discharge of indebtedness. The amount of the income includable generally is the difference between the face value of the debt and the amount paid in satisfaction of the debt. Babin v. Commissioner, 23 F.3d 1032, 1034 (6th 13 Cir. 1994), aff'g, T.C. Memo. 1992-673. The income 14 is recognized in the year cancellation occurs. 15 Montgomery v. Commissioner, 65 T.C. 511, 520 (1975). 16 17 18 19 20 21 22 23 24 25 A frequently cited rationale for the rule is that the cancellation results in an accession to income by effecting a freeing of assets previously offset by the liability arising from the indebtedness. United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); Cozzi v. Commissioner, 88 T.C. 435, 445 (1987). Petitioners rely on Zarin v. Commissioner, 916 F.2d 110, 115-116 (3d Cir. 1990), rev'g 92 T.C. 1084 (1989), for the proposition that a good faith dispute between a lender and borrower would cause a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 settlement not to give rise to an accession to income from cancellation of indebtedness. See Rood v. Commissioner, T.C. Memo. 1996-248, n.13, aff'd 4 without published opinion, 122 F.3d 1078 (11th Cir. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1997). Although the records that Mr. Ewing presented at trial left something to be desired, the records he did provide, along with his testimony, were sufficient to persuade the Court that he borrowed $10,400 from Citibank, he made monthly payments to Citibank during the period in question totaling approximately $9,650, and he paid an additional $2,400 to Citibank in connection with the settlement of the lawsuit, for an overall total of approximately $12,000. The $12,000 amount approximates principal and interest due on the $10,400 amount that Mr. Ewing borrowed from Citibank at the favorable rates accompany1ng Citibank's promotional offer from late 2002. We are also persuaded, based on all the facts and circumstances, that Mr. Ewing and Citibank engaged in a bona fide and good faith dispute over the proper rate of interest to be applied against the balance due on Mr. Ewing's account. Although there are indications that Mr. Ewing may have been 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 delinquent in making some of his monthly payments as early as January 2003, resulting in a default under his Card Agreement and permitting Citibank to dramatically increase the rate of interest due on account balances, Mr. Ewing suggested that any problems with the timeliness of his payments stemmed from Citibank's inability to properly process his electronic payments. In any event, these issues were the subject of the parties' State court litigation and they were never resolved in the light of the parties' decision to settle the dispute. We glean little from the parties' settlement agreement. The overriding theme of the document is that the parties agreed to disagree about the amount due on the loans. Although the settlement agreement states that Citibank might issue to Mr. Ewing a Form 1099, the document also states that 18 Citibank "makes no representations or warranties as 19 20 21 22 23 24 25 to the tax implications of the actions taken on the Account set forth herein". The one aspect of the settlement agreement worth noting is that the matter was settled for an amount that approximated the amount that Mr. Ewing maintained he owed on the account. Weighing the record as a whole, and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 considering all the facts and circumstances, we find that petitioner did not receive cancellation of indebtedness income as reported by Citibank on Form 1099,R. In sum, Mr. Ewing engaged Citibank in a legitimate dispute regarding the amount of debt, and in the light of the settlement the parties entered into we are unable to conclude that Mr. Ewing paid any more or any less to Citibank than he owed. Consistent with the preceding discussion, a decision will be entered for petitioners. This concludes the Court' s oral findings of fact and opinion in this case. (Whereupon, at 3:40 p.m., 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