Opinion ID: 4523213
Heading Depth: 2
Heading Rank: 1

Heading: Characterization of Assets

Text: The Hamiltons contend the Tax Court erred in characterizing the funds contained within the savings account as their assets for purposes of the insolvency inquiry. As our application of governing law to these stipulated facts will demonstrate, we disagree.
The Internal Revenue Code broadly defines gross income to encompass “all income from whatever source derived,” including income from the discharge of indebtedness. 26 U.S.C. § 61(a)(11). But a narrow statutory exception permits taxpayers to exclude debt from discharged income, so long as the discharge occurs at a time when the taxpayer is insolvent. 26 U.S.C. § 108(a)(1)(B). This exception acknowledges the reality that insolvent taxpayers will realize no income from discharge because—as a practical matter—no assets become available to the taxpayer. See United States v. Kirby Lumber Co., 284 U.S. 1 (1931). For this reason, the Code also limits the exclusion of discharge-ofindebtedness income to the amount by which the taxpayer’s liabilities exceed his assets. See 26 U.S.C. § 108(a)(3); see also Carlson v. Comm’r, 116 T.C. 87, 91 (2001) (“[T]he term ‘insolvent’ means the excess of liabilities over the fair market value of assets.”) (quoting 26 U.S.C. § 108(d)(3)). -6- It is well-settled that the taxpayer bears the burden of demonstrating that his liabilities outnumber his assets. E.g., Shepherd v. Comm’r, 104 T.C.M. (CCH) 108 (2012) (citations omitted). Although the Code does not expressly define the term “assets,” the Tax Court has, for these purposes, construed it to include any resource that “can give the taxpayer the ability to pay an immediate tax on income from the canceled debt.” Schieber v. Comm’r, 113 T.C.M. (CCH) 1144 (2017) (internal quotation marks omitted) (quoting Carlson, 116 T.C. at 104–05 (observing that even assets beyond the reach of other creditors could constitute assets for the purposes of 26 U.S.C. § 108(d)(3))). In conducting this practical inquiry, the Internal Revenue Service may appropriately prioritize “substance over form.” E.g., Frank Lyon Co. v. United States, 435 U.S. 561, 572–73 (1978) (citations omitted). In cases where, as here, a “transferor continues to retain significant control over the property transferred,” the Service may set aside niceties like formal title. Id. Indeed, we have repeatedly ratified the propriety of prioritizing economic reality in place of the formal characterizations taxpayers may lend transactions. See Rogers v. United States, 281 F.3d 1108, 1116–17 (10th Cir. 2002) (“[T]he doctrine of substance over form has been recognized in a number of our precedents.”). -7-
The Tax Court appropriately applied the substance-over-form doctrine to characterize the disputed funds as the Hamiltons’ assets for purposes of the insolvency calculation required by 26 U.S.C. § 108. Given the evidence disclosed by the stipulated record, the Tax Court properly concluded they exercised effective ongoing control over these funds. Prior to the transfer, the record suggests their son used this savings account rarely, if at all. No evidence indicates the transfer represented a gift. 4 Nor did their son pay any consideration in exchange for these funds. Moreover, he immediately provided Mrs. Hamilton with login credentials so that she could access these funds whenever she wanted. During Tax Year 2011, she withdrew nearly $120,000 to cover living expenses. 5 Their son, by contrast, never withdrew any of these funds. Although the Hamiltons now contend he could have changed the login credentials so as to lock out his mother, we think it more significant that he never did so. See, e.g., Sanford’s Estate v. Comm’r, 308 U.S. 39, 43 (1939) (“[T]he essence of a transfer is the passage of control over the economic benefits of the 4 The record discloses none of the tax documentation one might ordinarily expect for a gift of this size. 5 Although only Mrs. Hamilton accessed these funds, it is undisputed that she did so to pay joint living expenses. -8- property rather than any technical changes in its title.”). Because the Hamiltons retained effective control over the disputed funds, we conclude the Tax Court did not err. The Hamiltons also contend that—under Utah law—their son was the sole owner of the savings account. 6 But this argument bears not at all on the substance-over-form inquiry. See Carlson, 116 T.C. at 104–05 (observing that assets beyond the reach of other creditors may nonetheless constitute assets for federal tax purposes). This is because “taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed.” See Sanford, 308 U.S. at 43 (internal quotation marks and citations omitted). The Hamiltons alternatively assert we should treat the disputed funds as separate property owned solely by Mrs. Hamilton. This argument fails for much the same reason, since—as we have seen—assets beyond the reach of ordinary creditors may nonetheless constitute assets for federal tax purposes. See Carlson, 116 T.C. at 104–05. Here, the vast majority of the disputed funds arose from Mr. 6 On appeal, the Hamiltons advance a related argument—which they raised for the first time in their motion for reconsideration below—that the Tax Court lacked authority to apply the nominee inquiry to a deficiency proceeding. As the government observes, we ordinarily will not consider arguments previously available to litigants that were raised for the first time in post-judgment motions. See Servants of Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000). Even if we were to depart from that practice here, this argument would not disturb our conclusion that the Tax Court did not err. -9- Hamilton’s partnership distribution; and the funds Mrs. Hamilton withdrew during Tax Year 2011 supported both of their living expenses. We accordingly conclude that Mr. Hamilton—with Mrs. Hamilton acting as his agent—exercised effective control over these funds. See Sanford, 308 U.S. at 43. In our view, the Tax Court erred neither factually nor legally in sustaining the Notice of Deficiency. 7