TAX COURT OPINION

Case: John R. Bell & Linda J. Bell
Docket Number: 20345-13S
Judge: Guy
Opinion Type: bench
Filed: 10/28/2014
Pages: 7

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOHN R. BELL & LINDA J. BELL, Petitioners, v. KVC ) ) ) ) Docket No. 20345-13S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER 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 Los Angeles, California, on September 29, 2014, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral fimdings of fact and opinion, an appropriate decision will be entered. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. October 28, 2014 SERVED Oct 29 2014 Capital Reporting Company 3 1 Bench Opinion by Judge Daniel A. Guy, Jr. 2 October 1, 2014 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 John R. & Linda J. Bell v. Commissioner Docket No. 20345-13S THE COURT:. THE COURT HAS DECIDED TO RENDER QRAL FINDINGS OF FACT AND QPINION 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 authori.ty 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. Hereinafter in this bench opinion, section references are to the Internal Revenue Code of 1986, as amended, in effect for 2011, and Rule references are to the Tax Court Rules of Practice and Procedure. Respondent issued a notice of deficiency to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 . 1 Petitioners for.2013 4etermining a tax deficiency of $1,792 The tax deficiency is attributable to 3 . Petitioners' failure to report certain items of 4 5. 6 discharge of indebtedness income. Petitioners timely filed a petition·for redetermination with the Court pursuant to Section 6213 (a) . They resided in 7 Californi.a at the time the petition was filed. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Petitioner John R. Bell appeared at trial pro se. Cory H. Ellenson appeared on behalf of respondent. The parties agreed that Mrs. Bell had authorized Mr. Bell to represent her at trial. The sole issue for decision is whether petitioners are liable for federal income tax for 2011 in respect of items of discharged or canceled debt. Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. During 2011, Petitioners experienced financial difficulties and accumulated large sums of credit card debt. At the time, Petitioners owned their principal residence outright. Although 24 Mr. Bell obtained a home equity loan on the property 25 to pay some of the couple's debts, they were unable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company to pay all of their debts. During 2011, .Citibank, Atlantic Credit and .6 Finance, Incar and GE Capital Bank cancel ed .6-. 5 debts owed by Mrs. Bell of $2,042, $3,426, and $776, respectively. Duringe 2011r Chase Bank and Discover Financial Services canceled debts owed by Mr. Bell of $4,338 and $1,395, .respectively. The financial institutions listed above issued to Petitioners Forms 1099-C, Cancellation of 1 2 3 4 5 6 7 8 9 10 Debt, reporting the canceled debts summarized above. 11 Petitioners filed a timely ederal income tax return 12 13 14 15 16 17 18 19 20 21 22 23 24 25 for 2011. They did not include any canceled debt in gross income. Mr. Bell testified at trial. He acknowledged that he and his wife had credit card debt discharged during 2011, as outlined above. He asserted, however,. that the discharged debt should not be treated as income because Petitioners did not actually receive any payments when the debts were discharged. Mr. Bell conceded that at the end of 2011, the value of .Petitioners' assets exceeded their liabilities by approximately $51,000. The Commissioner's determination of a taxpayer's liability in a notice of deficiency normally is presumed correct, and the taxpayer bears 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company . 6 the burden of proving that the determination is incorrect . Rule 142 (a) ; Welch v. Helvering, 290 U. S. 111,115(1933). Gross income includes all income from 1 2 3 4 5 whatever source derived, and income from discharge of 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 .23 24 25 indebtedness is included in this broad definition. Se.c.. ccction 61(a) (12).; seclion 1.61-12(a), Income Tax Regsg united States v. Kirby Lumber Co., 284 U.S. 1(1931). "The underlying rationale for such inclusion is that to, the extent a taxpayer is released from indebtedness, he or she realizes an accession to income due to the freeing of assets previously offset by the liability." Jelle v. grece Commissioner, 116 T. C. 63,367 (2001) (citing Kirby Lumber); see Cozzi v. Commissioner, 88 T.C. 435,445(1987). The amount includable in income generally is the difference between the face value of the debt and the amount paid in satisfaction of the debt . Babin v . Commis sioner, sçaee. q«c-L 2 . 3d 1032, 1034 ( 6th cir.41994), aff'g T.C. Memo. 992-673; Rios v. spact Commissioner, T. C. Memo.32012-128 at *4. The income normally is recognized in the year the debt is canceled. Montgomery v. Commissioner, 65 T.C. 511, 520 (1975) . Section 108 provides statutory exceptions 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 to the general rule requiring the recognition of ..income from discharge of indebtedness. In relevant part, Section 108 excl.udes from gross income cancellation. of indebtedness when the discharge occurs in a bankruptcy proceeding, if the taxpayer is insolvent, or for specific types of indebtedness that are not before us in this case. Sec. 108(a),(f). As previously discussed, Petitioners do not dispute that they had debts discharged during 2011, as summarized above, and they have not asserted that any of the exceptions listed in Section 108 apply in this case. Rather, they maintain that canceled debt should not be counted as gross income. Although Petitioners did not receive any form of direct payment when their debts were canceled, they are considered to have reali.zed income due to the freeing of assets previously offset by their various debts, as explained by the Supreme 19 Court in the Kirby Lumber case. The Court is not at 20 21 22 liberty to create an exception to the general rule of inclusion that is applicable in this case -- we are obliged to apply the law as written. See Iselin v. 23 United States, 270 U.S. 245, 250-251(1926). 24 25 Accordingly, we sustain Respondent's determination that Petitioners received discharge of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 2 3 4 indebtedness income totaling $11, 977 during. 2011 and find that they were. obliged to include that amount in gross income that year. Consistent with the foregoing, a decision will be entered for Respondent. This concludes the Cóurt ' s Oral Findings of Fact and 6 Opinion in this case. (Whereupon, at 4:10 p.m., the above- entitled matter was concluded.) - . . 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