TAX COURT OPINION

Case: Mazhar Tabrezi, f.k.a. Agha Hussain & Sajida Razvi
Docket Number: 5213-04
Judge: Goeke
Opinion Type: memo
Filed: 03/30/2006
Pages: 6

ADM. RECORD5D EhVICE GE FILES T.C. Memo. 2006-61 UNITED STATES TAX COURT MAZHAR TABREZI, f.k.a. AGHA HUSSAIN, AND SAJIDA RAZVI, COMMISSIONER OF INTERNAL REVENUE, Respondent Petitioners v. Docket No. 5213-04. Filed March 30, 2006. Richard D. Grossman, for petitioners.. Kathleen C. Schlenzig, for respondent. MEMORANDUM OPINION GOEKE, Judge: Respondent determined a deficiency in petitioners' 2001 Federal income tax of $43,829 and an accuracy- related penalty of $8,765 pursuant to section 6662(a).¹ After ¹Unless otherwise indicated, all section references are to the Internal.Revenue Code, and all Rule references are to the Tax ) ( continued. . . SERVED MAR 3 0 2006 - 3 - Background Petitioners, who are husband and wife, resided in Glendale Heights, Illinois, at the time of filing their petition. Between December 1998 and May 1999, petitioners signed 22 notes as the obligors in the aggregate principal of $2,529,700 and 22 mortgages securing those notes. Petitioner Sajida Razvi's brother, Syed Razvi, asked petitioners to sign the documents as a personal favor to him. Petitioners signed the documents without extensively reviewing them. Each note was used to purchase a different property (all condominiums) and was secured by a mortgage. There was a covenant in most of the notes and the accompanying mortgages obligating either petitioner to pay the full amount of principal and accrued interest of the debt. Petitioners also signed 22 U.S. Department of Housing and Urban Development (HUD) settlement statements in connection with each. mortgage. The principal amount due under each of the 22 notes was over $100,000.. Unknown to petitioners, the mortgages were obtained by fraud because the fair market value of the properties securing the mortgages was substantially inflated and, in some cases, was in fact far less than the face amount of the notes that petitioners signed. In October 2004, Mr. Razvi was indicted for participating in a scheme with others to defraud and obtain more t.han $27 million of mortgage loan proceeds from various banks and mortgage lending - 5 - outstanding debts were extinguished. During 2001, four of the notes were partially discharged by the following lenders: Creditor Household Finance Countrywide Home Loans Superior Federal Bank Washington Mutual Initial Note Amount Amount of Debt Canceled $111,200 $62,707 127,200 74,670 111,200 103,171 111,200 75,615 The Household Finance debt was canceled on April 27, 2001, and the Superior Federal Bank debt was canceled on March 1, 2001. The remaining debts listed were canceled in 2001. Petitioners did not include the amounts of debts canceled as income in their 2001 joint Federal income tax return. Petitioners reported a total income in 2001 of $78,416, comprising mostly wages. On December 29, 2003, respondent issued petitioners a notice of deficiency for the taxable year 2001. Respondent determined that the amounts of canceled debt from Countrywide Home Loans, Superior Federal Bank, and Washington Mutual should have been included in petitioners' gross income. Respondent did not include the canceled debt of $62,707 from Household Finance in the notice of deficiency but raised it at trial through the stipulation of related exhibits without explaining that it was a 1971); Cascade Millino & Elevator Co. v. Commissioner, 25 B.T.A. 946 (1932), respondent conceded that the COD income from the discharge of the three mortgages (Countrywide Home Loans, Superior Federal Bank, and Washington Mutual) identified in the notice of deficiency qualified under the exception to COD income provided in section 108(a)(1) (B) because petitioners were insolvent on the dates those mortgages were discharged. The new adjustment claimed by respondent to be COD income is $62,707, (cid:16)042while the three mortgages respondent treated in the·notice of deficiency as giving rise to COD income totaled $253,456. Therefore, since there is no assertion of an overall increase in deficiency', this case does not fall under section 6214. However, by claiming that an amount arising from a different mortgage is COD income, respondent has raised a new matter and therefore under our Rules has the burden of proof in regard to that claim. B. Burden of Proof Gross income includes income from the cancellation of indebtedness. Sec. 61(a)(12). However, an exception to the inclusion of COD income in gross income is provided for taxpayers who are insolvent at the time of cancellation of indebtedness. Sec. 108(a)(1)(B). The determination of insolvency is based on the taxpayer's liabilities and assets immediately before the discharge of debt. Sec. 108(d)(3). Petitioners claim that they were insolvent on the calculation date. Normally, the burden of - 9 - presentation of different evidence.'" Id. at 191 (quoting Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989)). Thus, we conclude that respondent has raised a new matter. Respondent went beyond the scope of the original deficiency determination by. arguing in his posttrial brief that the discharge of the Household Finance mortgage gave rise to COD income. The deficiency determined in the notice of deficiency was based on COD income from the discharge of three other mortgages. Different evidence is required to show that the Household Finance mortgage generated COD income, because the date of its cancellation, and thus the date for determining petitioners' solvency for purposes of section 108(a)(1)(B) and (d)(3), differs from the date on which any of the other three mortgages was canceled. Therefore, respondent bears the burden of proof and must show, by a preponderance of the evidence, that petitioners were solvent under section 108(a)(1)(B) as of the calculation date. For the reasons discussed below, we conclude that respondent has failed to meet his burden of proof. C. Respondent's Failure To Meet His Burden. of Proof In order to establish petitioners' solvency as of the calculation date, respondent must prove by a preponderance of the evidence that the fair market value of petitioners' assets then exceeded their liabilities. See Merkel v. Commissioner, 109 T.C. 483, 484 (1997). To exclude from that calculation any portion of - 11 - failed to meet his burden, it is unnecessary for us to decide whether petitioners' liabilities on the calculation date were greater, than the amount respondent conceded. Conclusion Because he introduced a new matter, respondent has the burden under Rule 142(a) of proving that petitioners were insolvent. Rule 142(a). Respondent failed to meet that burden. We therefore hold that no COD income is includable in petitioners' gross income for the year in suit. In addition, because we find there is no COD income, there is no addition to tax. To reflect petitioners' concession of the dividend income, and the foregoing, Decision will be entered under Rule 155.