Opinion ID: 221561
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Heading: Cancellation of Indebtedness Income

Text: Gross income that is subject to taxation includes income from the cancellation of indebtedness. Under I.R.C. § 61(a)(12), a taxpayer realizes income from the cancellation of indebtedness where a debt is canceled, forgiven, or otherwise discharged for less than the full amount. 2925 Briarpark, Ltd. v. Comm’r, 163 F.3d 313, 318 (5th Cir. 1999). The Tax Court found that the Felts must recognize $2 million in cancellation of indebtedness income in 1987 from the cancellation of debts that the taxpayers stipulated were reflected in the records of David Felt d/b/a American Guaranty, Inc. (AGI) and which they had not repaid. The taxpayers argue that any debt David Felt owed to AGI was setoff by the debt AGI owed him and that the income, if any, should not be recognized in 1987 as found by the Tax Court, but in a later year. However, the taxpayers 3 Case: 10-60512 Document: 00511547981 Page: 4 Date Filed: 07/21/2011 No. 10-60512 failed to present any evidence to establish they took any of the steps required under Texas law to set off a debt. See Tex. Commerce Bank-Hurst, N.A. v. United States, 703 F.Supp. 592, 594-95 (N.D. Texas, 1988), aff’d. sub nom., Texas Commerce Bank-Fort Worth, N.A. v. United States, 896 F.2d 152 (5th Cir. 1990); In re Archer, 34 B.R. 28, 30 (Bankr. N.D. Tex. 1983); Shearson Lehman Bros., Inc. v. Resolution Trust Corp., No. 05-93-00527-CV, 1994 WL 60907,  (Tex. App. - Dallas, Feb. 23, 1994, no pet.)(not designated for publication). The Tax Court held that the debt was cancelled in 1987, the year the maturity date of the latest AGI note passed with no payment on the loan. The test for determining when cancellation occurs depends on a practical assessment of the facts and circumstances relating to likelihood of repayment. Cozzi v. Comm’r, 88 T.C. 435, 445 (T.C. 1987). Under Cozzi, “[a]ny ‘identifiable’ event which fixes the loss with certainty may be taken into consideration.” Id. at 445. Cozzi specifically found that the year of the scheduled final payment under a loan agreement was an identifiable event sufficient to indicate cancellation of indebtedness. Id. at 447. Since the law recognizes that there may be more than one identifiable event that triggers the cancellation, the Tax Court’s fact-bound finding is not clearly erroneous.