TAX COURT OPINION

Case: Danny R. Love
Docket Number: 8808-20
Judge: Morrison
Opinion Type: bench
Filed: 05/28/2021
Pages: 10

United States Tax Court Washington, DC 20217 DANNY R. LOVE, Petitioner v. Commissioner of Internal Revenue, Respondent Docket No. 8808-20. 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 petitioner and respondent a copy of the pages of the transcript in the above case before Judge Richard T. Morrison, at Memphis, Tennessee, on April 30, 2021, containing his oral findings of fact and opinion rendered at the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision will be entered. (Signed) Richard T. Morrison Judge Served 05/28/21 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 Bench Opinion by Judge Richard T. Morrison 3 April 30, 2021 Danny R. Love v. Commissioner of Internal Revenue Docket No. 8808-20 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 on as precedent in any other case. 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. Unless otherwise indicated, all references to sections are to the Internal Revenue Code of 1986, as amended and in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent, the Commissioner of Internal Revenue, is referred to as the IRS. On January 27, 2020, the IRS sent petitioner Danny Ray Love a notice of deficiency for the 2017 tax year determining a deficiency of $2,739. The deficiency was computed from an increase in taxable income due to unreported taxable wages of $1,714 and unreported cancellation of debt income of $9,027. He filed a timely 1 2 3 4 5 6 7 8 9 petition for redetermination under section 6213(a). The 4 parties stipulated that Love received $1,714 of wages from GP Memphis LP in 2017. At trial, Love confirmed that these wages were not reported on his return. Therefore, the sole non-computational issue to be decided is whether Love must recognize cancelled-debt income under section 61(a)(12) for tax year 2017. We hold that Love must recognize cancelled-debt income for 2017. We have jurisdiction under section 10 6214(a). 11 12 Findings of Fact Love was a resident of Tennessee when he filed 13 his petition. 14 15 16 17 18 19 20 21 22 23 24 25 On November 8, 2007, Love took out a personal loan from CitiFinancial. This loan had a term of five years, principal amount of $10,000.19, an annual interest rate of 25.55% resulting in a total interest expense of $7,756.81, and a monthly payment of $295.95, with the first payment due on December 8, 2007. Of the $10,000.19 in proceeds, Love received $1,894.35 of cash while the remaining $8,105.84 was used to repay the balance on his prior outstanding loan. Love made a payment of $295.95 on December 15, 2007 and $310.62 on January 25, 2008 but missed payments for February and March of 2008. 1 2 3 4 5 6 7 8 9 Starting on March 14, 2008, CitiFinancial 5 contacted Love about his missed payments. Love was either unresponsive or evasive. On April 15, 2008, CitiFinancial made the decision to take legal action. On July 10, 2008, CitiFinancial received a total judgment from the General Sessions Court of Shelby County, Tennessee on its collection action for $13,354.10. On October 23, 2008, CitiFinancial was awarded 10 the right to garnish Love's wages at a rate of $100 per 11 month. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Between December 2008 and December 2012, CitiFinancial garnished $100 from Love's wages every month; generally $70 to $85 of the payment was used to make principal repayments while the rest was used to pay fees. The last payment CitiFinancial received was a payment of $100 on December 4, 2012, of which $85.33 was used to pay the principal while $14.67 was used to pay fees. This final $100 payment reduced the balance to approximately $9,027. On July 18, 2017, CitiFinancial sent Love a letter informing him that the remaining balance of $9,027.10 for this loan was forgiven. Love may not have received this letter. CitiFinancial also issued Love a Form 1099-C reflecting the cancellation of indebtedness 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 income of $9,027.00 for tax year 2017. 6 While his wages were being garnished, Love had an unrelated loan outstanding that was being collected by Midland Funding LLC. On January 18, 2012, Midland initiated a collection action against Love in the General Sessions Court of Shelby County. The record does not reveal the terms of the loan or the circumstances that motivated Midland to pursue legal action. On March 8, 2012, Midland received a judgment in its collection action for $13,166.26. On May 17, 2012, Midland was awarded the right to garnish Love's wages at a rate of $150 per month. Pursuant to this award, Midland received periodic payments of $150 from Love over the remainder of 2012 while Love's wages were concurrently being garnished by CitiFinancial. The payments to Midland continued after 2012. On March 4, 2015, Love brought an action against Midland and against Hosto Buchan, the law firm representing Midland, in the Court of General Sessions of Shelby County for "breach of contract, violation of the FTC, Fair Debt Collection Practices Act, violation of Tennessee debt collection law, and unfair predatory collection practices." On September 22, 2015, Love's suit was dismissed with prejudice. Subsequently, the Midland loan was extinguished through some combination of settlements, court action, and payments. As of 2017, Love did not have any outstanding 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 7 debt to Midland. 1. Burden of Proof Discussion The IRS's determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Love has not argued, nor does the record show, that any of the exceptions to this general rule apply. Therefore, he has the burden of proof. 2. Cancellation of Debt Income Section 61(a) provides that gross income means "all income from whatever source derived". Gross income generally includes income from the discharge of indebtedness. Sec. 61(a)(12). "The general theory is that to the extent that a taxpayer has been released from indebtedness, [it] has realized an accession to income because the cancellation effects a freeing of assets previously offset by the liability arising from such indebtedness." Cozzi v. Commissioner, 88 T.C. 435, 445 (1987) (citing United States v. Kirby Lumber Co., 284 U.S. 1 (1931)). Accordingly, when one's obligation to repay a debt is "settled for less than the amount of the loan, one ordinarily realizes income from discharge of indebtedness." Warbus v. Commissioner, 110 T.C. 279, 284 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 (1998). 8 Love argues that he did not have income from discharge of indebtedness for 2017 because the unpaid portion of his debt had been earlier satisfied in part due to a favorable ruling in the Court of General Sessions of Shelby County. Love contends that Midland initially attempted to collect approximately $13,000 but he sued it in Shelby County court alleging the $13,000 included fees and interest so excessive that Midland violated various collection laws. Love claims that the Shelby County court ruled in his favor and ordered the debt extinguished for a $4,000 payment. He believes the IRS is arguing that he must include in his gross income, the $9,000 difference between the approximately $13,000 Midland attempted to collect and the $4,000 payment ordered by the Shelby County court. Because CitiFinancial and not Midland was the lender of the debt discharged in 2017, Love's argument is entirely dependent on his assertion that the loan cancelled by CitiFinancial is the same loan as the one he settled with Midland. He speculates that CitiFinancial sold his debt to Midland. The IRS does not dispute that the loan from Midland was satisfied; instead, it argues that the loan from Midland was a different loan from the one that CitiFinancial cancelled in 2017. The IRS contends that the loan from CitiFinancial remained outstanding until CitiFinancial cancelled it in 2017. 9 We construe Love's argument to be that he cannot have earned cancelled-debt income because there was no outstanding debt to be discharged in 2017 according to Love; the CitiFinancial loan was sold to Midland, which was discharged in 2015 through some combination of settlements, payments, and court action. While we have significant concerns about the accuracy and characterization of the facts Love uses to support his argument, his argument flounders on the threshold issue of whether the Midland debt was the same debt that was discharged by CitiFinancial. We find that the debt discharged by CitiFinancial was a different loan from that which was resolved between Love and Midland. First, the outstanding balances were different during contemporaneous time periods. Midland obtained a judgment amount of $13,166.26 on March 8, 2012. On March 8, 2012, Love's loan from CitiFinancial had an outstanding balance of $9,819.57. Love offers no arguments or evidence to address this discrepancy. Second, CitiFinancial was still garnishing Love's wages for its 2008 judgment when the Shelby County court allowed Midland to begin garnishing his wages as well. We find it implausible that the same court would order duplicative garnishments for the same debt under 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 different docketed cases. 10 Third, none of Love's $150 payments made to Midland pursuant to the March 8, 2012 judgment were shown to pay down the balance on his debt with CitiFinancial, either in CitiFinancial's internal account history or in Shelby County court account receivable records. Lastly, Love was unable to produce any documentation to substantiate his assertion that his debt was sold by CitiFinancial to Midland, such as a bill with a notice informing him that payments were being made to Midland instead of CitiFinancial. In fact, CitiFinancial records do not even refer to Midland. In considering the circumstances in totality, we find that the debt to Midland was different from the debt discharged by CitiFinancial. It follows that any extinguishment or payment of the Midland debt prior to 2017 is irrelevant to the CitiFinancial loan. There is nothing in the record to suggest that the loan from CitiFinancial was extinguished prior to 2017. Therefore, we find that the CitiFinancial loan was still outstanding 21 in 2017. 22 23 24 25 We now determine whether CitiFinancial's cancellation of this debt results in discharge of indebtedness income for Love. We hold that it does. Love borrowed $10,000.19 from CitiFinancial, which included 1 2 3 4 5 6 7 8 9 10 11 $7,756.81 of finance charges, resulting in a total 11 indebtedness of $17,757.00. CitiFinancial records show that by December 2012, this $17,757.00 debt was reduced to $9,027.10. CitiFinancial notified Love with a Form 1099-C that his $9,027.10 will be forgiven, making it clear that this debt will never have to be repaid. We sustain the determination in the notice of deficiency that CitiFinancial's cancellation of the $9,027.10 that Love owed is includable in Love's gross income and is subject to federal income tax. This concludes the Court's Oral Findings of Fact 12 and Opinion. 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 4:11 p.m., the above-entitled matter was concluded.)