TAX COURT OPINION

Case: Scot Christian Kelly & Wendy Warfield Kelly
Docket Number: 26111-15S
Judge: Guy
Opinion Type: bench
Filed: 12/07/2016
Pages: 9

CMS UNITED STATES TAX COURT WASHINGTON, DC 20217 SCOT CHRISTIAN KELLY & WENDY WARFIELD KELLY, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) Docket No. 26111-15S. ) ) ) ) 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 New York, New York, on November 16, 2016, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. oral findings of fact and opinion, decision will be entered under Rule 155. further In accordance with the It is ORDERED that respondent's Motion for Summary Judgment, filed September 13, 2016, is granted. It is further SERVED Dec 07 2016 - 2 - ORDERED that the parties shall submit computations under Rule 155, Tax Court Rules of Practice and Procedure,¹ on or before March 7, 2017. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. December 7, 2016 ¹Petitioners can access the text of Rule 155 on the Court's Web site at w_w_w_.u_staxcourt.gov. Petitioners should consider discussing the preparation of the computations with respondent's counsel. Capital Reporting Company Bench Opinion by Special Trial Judge Daniel A. Guy, 3 Jr. November 16, 2016 Scott Christian Kelly & Wendy Warfield Kelly v. Commissioner Docket No. 26111-15S 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 ' Procedure. 19 20 21 22 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 pf the Tax Court Rules of Practice and Procedure. 23 Hereinafter in this bench opinion, section references 24 25 are to the Internal Revenue Code of 1986, as amended, in effect for 2013, and Rule references are to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 Tax Court Rules of Practice and Procedure. Respondent issued a Notice of Deficiency to 3 Petitioners de'termining an income tax deficiency of 4 5 6 7 8 $2,471 for the taxable year 2013. The tax deficiency is primarily.attributable to Respondent's determination that Petitioners failed to report discharge of indebtedness income arising from a credit card account that Mr. Kelly had maintained 9 with American Express Centurion Bank (American 10 Express). Petitioners timely filed a petition for 11 ·redetermination with the Court pursuant to section 12 (cid:16)0426213(a).At the time the petition was filed, 13 Petitioners resided in New York. 14 On September 13, 2016, Respondent filed a 15 motion for summary judgment with a supporting l'6 17 18 declaration under Rule 121, Petitioners filed an opposition to Respondent's motion to which Respondent filed a -reply. For purposes of prosecuting his . 19 motion for summary judgment, Respondent concedes so 20 much of the tax deficiency as relates to a 21 determination in the Notice of Deficiency that 22 Petitioners failed to report a distribution from a 2G 24 25 health savings account of $327 in 2013. Respondent's motion for summary judgment was called for hearing in New York, New York, on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 November 15, 2016. Petitioners Scott and Wendy Kelly appeared and were heard. Marissa J. Savitt appeared on beha.lf of Respondent. The following facts are not in dispute or are draw'n from the pleadings and other documents that make up the record in this case. Mr. Kelly maintained a credit card ac·count 8. with American Express and accumulate a balance on the PG 9 account of $9,627 (credit card debt). In 2013, Mr. 10 Kelly hired a debt counselor and entered into a 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 agreement with Nationwide Credit, Inc., under which he agreed to pay $3,080 in satisfaction of his credit card debt. The balance of his debt, an amount that totaled $6,547, was canceled. Petitioners acknowledged at the hearing of this matter that they have not received any bills or similar notices demanding payment·of the $6,547 amount described above. Petitioners have not suggested that they were re,levan+ +o insolvent at any time La this case. D6' American Express issued a Form 1099-C, (ancellation of[hebt, reporting' that Petitioners received cancellation of indebtedness income of $6,547 in 2013. Petitioners maintained'that they did ß6 not receive the Form 1099-C. In any event, they did not include the $6,547 of canceled indebtedness as an 866.488.DEPO . www.Capita1ReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 item of gross income when they filed their joint federal income tax return for 2013. In December 2015, Mr. Kelly wrote at least two letters to American Express stating that the Form 1099-C had been fraudulently issued, that the canceled debt constituted a gift for tax purposes, that American Express should send an amended Form 1099-C to the Internal Revenue Service, suggesting and that a failure to respond would bar American Express from denying that the Form 1099-C in question was fraudulent. American Express did not respond to Mr. 12 Kelly's letters. 13 14 15 16 Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be granted 17 with respect to all or any part of the legal issues 18 19 20 21 22 23 24 25 in controversy "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits ***, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." Rule 121(a) and (b). Respondent's motion for summary judgment is 866.488.DEPO www.CapitalReportingCompany.com I Capital Reporting Company 1 well-founded based on the averments therein and the 7 2 3 4 5 6 7 8 9 10 11 12 13 declaration and related exhibits attached thereto. As explained below, we conclude that there is no genuine dispute as to any material fact and that Respondent is entitled to judgment as a matter of law. It is well settled that money received pursuant to a loan is not includable in gross income at the time that it is lent because there is ae- p obligation to repay it. See Commissioner v. Tufts, 461 U.S. 300, 307 (1983). However, if the obligation to repay a loan is forgiven or canceled by the lender, gross income may arise. See sec. 61(a)(12); 14 United States v. Kirby Lumber Co., 284 U.S. 1, 3 15 16 17 18 19 20 21 22 23 24 25 (1931); see also sec. 108.. In general, cancellation of indebtedness produces income in an amount equal to the difference between the amount due on the obligation and the amount paid for the discharge. See Babin v. Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), affg.T. C. Memo. 1992-673. The rationale for this legal principle is that cancellation of indebtedness provides the debtor with an economic benefit that is equivalent to income. See Friedman v. Commissioner, 216 F.3d 537, 545 (6th Cir. 2000), affg T. C. Memo. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 1998-196. The moment it becomes clear that the debt 2 will never have to be paid, such debt must be viewed 3 4 5 6 7 8 as having been discharged. Cozzi v. Commissioner, 88 T. C. 435, 445 (1987). The record reflects that Mr. Kelly had a balance due of $9,627 on-his American Express credit card. In 2013, a debt counselor that Mr. Kelly had hired negotiated a reduction of this debt and Mr. 9 Kelly paid $3,080 in full satisfaction of it. Mr. 10 Kelly was relieved of his obligation to repay the 11 12 13 14 remaining balance of $6,547. Consistent with section 61(a)(12) and the cases cited above, Mr. Kelly received income of $6,547. Mr. Kelly asserted at the hearing of this 15 matter that discharge of indebtedness income should 16 17 18 19 20 21 not include the part of his debt to American Express comprising interest and penalties. We disagree. See Brooks v. Commissioner, T.C. Memo. 2012-25 (citing Jelle v. Commissioner, 116 T.C. 63 (2001)); see also DG- Payne v. Commissioner, T.C..Memo. 2008-66, aff'd, 357 F.App'x 734 (8th Cir. 2009). We likewise reject Mr. 22 Kelly's argument that he should be permitted to 23 24 offset the fee that he paid to his debt counselor against his discharge of indebtedness income. See 25 Melvin v. Commissioner, T.C. Memo. 2009-199 ("Section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 61(a)(12) manifestly does not provide for any kind of deduction.") Mr. Kelly's speculation that American Express may have sold his credit card account "receivables" to some other organization is misguided and misplaced. The question we must decide is 7 whether Mr. Kelly received discharge of indebtedness 8 9 10 11 12 13 14 income; we are not concerned in this case with the tax liability of American Express. Moreover, the letters that Mr. Kelly wrote to American Express do not establish that the Form 1099-C was incorrect or fraudulent. Mr. Kelly's own admissions showed that the Form 1099-C was accurate. Inasmuch as the agreed facts show that Mr. 15 Kelly received discharge of indebtedness income in 16 2013 in the 'amount determined in the Notice of 17 Deficiency, Respondent is entitled to judgment as a 18 matter of law. This decision will be entered under Rule 155 to account for Respondent's concession noted above. This concludes the Court's oral findings of fact and opinion. 19 20 21 22 23 24 25 . . . www.CapitalReportingCompany.com 866.488.DEPO