                        T.C. Memo. 2002-191



                      UNITED STATES TAX COURT



                GEORGE W. EARNSHAW, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5221-01.             Filed August 5, 2002.


     George W. Earnshaw, pro se.

     Charles M. Berlau, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined a deficiency of $3,514

in petitioner’s Federal income taxes for 1998.    The issue for

decision is whether petitioner must recognize discharge of

indebtedness income as a result of settlement of his Mastercard

account with MBNA America Bank (MBNA).    Unless otherwise

indicated, all section references are to the Internal Revenue
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Code in effect for the year in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in Shawnee Mission, Kansas, at the time that

he filed the petition in this case.    Petitioner is a lawyer

admitted to practice in Kansas.   Petitioner filed his income tax

return for 1998 using the cash receipts and disbursements method

of accounting.

     Prior to April 1996, petitioner had two credit card accounts

with MBNA, a Mastercard account and a Visa account.    On April 8,

1996, the balance due on petitioner’s Visa account was

transferred to his Mastercard account.    On or about June 9, 1996,

petitioner sent to MBNA a check for $1,000, a copy of his May

1996 statement with a handwritten notation, and a separate

handwritten note.   In the handwritten notation on the statement

and in the handwritten note, petitioner stated:    “My current

balance is $29,837.61.”   Petitioner requested verification or

correction of the balance.

     On August 12, 1996, petitioner obtained a cash advance of

$1,200 against his Mastercard account.    The sum advanced and a

$10 cash advance fee were posted to petitioner’s account on

August 14, 1996.
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     From July 20, 1996, through September 19, 1997, petitioner

made the following payments on his account:

              Posting Date             Payment Amount

                 7-20-96                 $1,000
                10-21-96                    800
                 3-14-97                    350
                 4-21-97                    350
                 5-22-97                    350
                 6-19-97                    350
                 7-19-97                    350
                 8-19-97                    350
                 9-19-97                    350
              Total                      $4,250

     Beginning with the July 1996 statement, a total of $6,146.66

in finance charges was posted to petitioner’s Mastercard account.

Late fees were also posted to petitioner’s Mastercard account

from July 19 to December 18, 1996, and in October, November, and

December 1997.   Petitioner objected to some of the late fees on

the ground that timely payments were made.    In or before

September 1997, petitioner began contesting the late fees and

finance charges posted to his account.    Beginning in October

1997, petitioner ceased making payments, advising MBNA that he

might resume payments when a dispute over the late fees was

resolved.   In a letter dated January 15, 1998, MBNA offered to

settle petitioner’s account for a payment of $12,700 by

February 1, 1998.   On January 28, 1998, petitioner sent a check

to MBNA in the amount of $12,700.

     At the time of the settlement of petitioner’s account,

MBNA’s records reflected a balance of $32,566.70.       MBNA sent to
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petitioner and to the Internal Revenue Service a Form 1099-C,

Cancellation of Debt, reporting discharge of indebtedness income

in the amount of $19,866.70.   On April 21, 1999, petitioner sent

the Form 1099-C back to MBNA with a cover letter in which he

stated, among other things:

     The debt was never a “forgiveness” of anything, but as
     you know a compromise of many issues of a vague,
     doubtful, and disputed claim. * * *

     I stopped my payments to you after many accusations on
     both sides, and after a period of time, I was offered a
     complete settlement of the account for $17,500. After
     considerable negotiations, a settlement was effected of
     $12,750 [sic]. This was to save us both a law suit and
     legal expense, as well as an equitable conclusion of
     your improper handling of my account.

Petitioner attached to his 1998 tax return a statement as

follows:

     No amounts pursuant to the attached   1099 have been
     included in individual income. The    cancellation should
     be characterized as a compromise of   a doubtful and
     disputed claim. No deductions were    taken for these
     expenditures.

     Respondent determined that petitioner received cancellation

of indebtedness income in 1998 in the amount of $19,866.70.

Respondent also determined that petitioner had unreported

interest income of $128 and adjusted petitioner’s taxable Social

Security income.   Petitioner did not in his petition or at trial

dispute the interest or Social Security income adjustments.      He

is thus deemed to have conceded them.
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                               OPINION

     Petitioner contends that he did not have cancellation of

indebtedness income from his settlement with MBNA, because the

settlement reflected compromise of a disputed liability.

Petitioner testified at trial that he disputed the finance

charges on his account because of changing interest rates charged

by MBNA.    Respondent contends that petitioner acknowledged as of

May 1996 a balance owing to MBNA and that the amount of

petitioner’s Mastercard account was always liquidated.

     Section 61(a)(12) includes in the general definition of

gross income “income from discharge of indebtedness”.     Respondent

relies on the discussion of this provision in Preslar v.

Commissioner, 167 F.3d 1323 (10th Cir. 1999), revg. T.C. Memo.

1996-543.   In Preslar, the Court of Appeals for the Tenth

Circuit, to which our decision in this case is appealable,

examined the history of the discharge of indebtedness income rule

and the “contested liability” exception to recognition of

discharge of indebtedness income.   The debt in Preslar was the

balance owing on a $1 million promissory note.     The note had been

given to a bank by the taxpayers in connection with the purchase

of a ranch that was to be developed by the taxpayers.     The bank

permitted the taxpayers to repay the loan by assigning the

installment sales contracts of purchasers of the developed

property to the bank at a discount.      When the payee-bank became
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insolvent, the Federal Deposit Insurance Corporation (FDIC) was

appointed as receiver.   The FDIC refused to accept further

assignments of sales contracts as repayment.   The taxpayers

ceased making payments and filed an action against the FDIC.   The

action was settled after the FDIC agreed to accept $350,000 in

full satisfaction of the indebtedness, on which the then balance

was $799,463.   The Court of Appeals held that the contested

liability doctrine did not apply because the amount of the

taxpayers’ debt was at all times liquidated.   The Court stated,

in part:

          In addition, the Preslars’ characterization of
     their dispute with the FDIC as the culmination of their
     dispute over the ranch loan is not faithful to the
     evidence. The dispute with the FDIC focused only on
     the terms of repayment; it did not touch upon the
     amount or validity of the Preslars’ debt. * * * In
     sum, the Preslars’ underlying indebtedness remained
     liquidated at all times. [Id. at 1330.]

We agree with respondent that the rationale of Preslar and

similar cases applies to the balance of petitioner’s Mastercard

account as of the time in May 1996 that he made a $1,000 payment

and acknowledged the balance of $29,837.61 before the payment.

Petitioner has not disputed that he owed reimbursement to MBNA

for the $1,200 cash advance in August 1996 and the $10 cash

advance fee, and those amounts also appear to be liquidated.

     We do not agree with respondent, however, that Mastercard’s

subsequent posting of various finance charges and late payment

fees to petitioner’s account creates a liquidated indebtedness.
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We need not address all of the implications of the Preslar

opinion as to the scope of exceptions to the discharge of

indebtedness income.    The question in this case is whether a debt

existed as asserted by respondent in the amount of $32,566.70

before the settlement between petitioner and MBNA.    On the facts

of this case, we do not totally agree with either party.

     Petitioner argues that respondent’s failure to call any

witnesses from MBNA gives rise to a negative inference.

Respondent was not required to call such witnesses, and the

records maintained by MBNA were received in evidence as a result

of the stipulation.    The MBNA statements, however, standing

alone, do not establish a debt between petitioner and MBNA beyond

the amount that petitioner admitted in his handwritten notes on

the May 1996 statement.    Petitioner’s testimony about the ongoing

dispute is not contradicted.    He explained his failure to have

documents corroborating the dispute with MBNA between June 1996

and September 1997 as attributable to his disposal of those

records after the dispute was resolved.    The pattern of his

payments, however, shows a 3-month gap between the July and

October 1996 payments and almost 5 months between the October

1996 payment and a payment in March 1997.    The payments made for

March through September 1997 were minimal in relation to the size

of the account.   Petitioner objected to certain late fees on the

ground that timely payments were made.    Between January and
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September 1997, no late fees are reflected on his account.    The

annual rate at which finance charges were accrued dropped from

April 1997 through December 1997, according to MBNA’s records.

Apparently, some negotiations were going on during that time.

     There is no indication that the settlement with MBNA was

based on petitioner’s inability to pay the amounts in dispute,

and he denies that he was insolvent at the time.   The record

fully supports the inference that a dispute between petitioner

and MBNA existed and was carried on over many months.    We accept

his testimony that he engaged in an ongoing dispute with MBNA

that ultimately induced MBNA to compromise petitioner’s account

for substantially less than the balance recorded in its

statements to petitioner.

     As of June 1996, petitioner’s undisputed balance was

$28,837.61.   His account increased by uncontested charges of

$1,200 for a cash advance and $10 for a cash advance fee.    He

subsequently made nine payments totaling $4,250 and a settlement

payment of $12,700.   The net uncontested, liquidated balance,

which we conclude should be the amount of petitioner’s

cancellation of indebtedness income, is $13,097.61.

     Petitioner has made other arguments that have no merit.      In

his trial memorandum, he suggested that the amount of

indebtedness canceled should be treated as “damages”.    Respondent

infers that petitioner is suggesting that the reduction in his
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debt would be damages excludable from gross income under section

104(a)(2).    We agree with respondent that nothing in the record

would support that claim.

     Petitioner asserts that respondent should have conceded this

case at the conclusion of trial but that respondent’s counsel

refused to do so, allegedly based on a posttrial ex parte

communication with the Court.   At the conclusion of trial, as

reflected in the transcript, the Court directed respondent’s

counsel to brief cases dealing with settled or compromised

claims.   No off-the-record or ex parte communications between the

Court and respondent’s counsel have occurred.   Respondent’s brief

discusses the evidence and case law supporting respondent’s

position.    Petitioner has not complied with the Court’s order or

rules concerning briefs.

     Petitioner has also complained that MBNA presumably received

a deduction for the amount reported on Form 1099-C as income to

petitioner.   MBNA’s tax liability is not before the Court.   It is

unnecessary, in any event, that a correlation exists between

petitioner’s income, as a cash basis taxpayer, and deductions of

MBNA, presumably an accrual basis taxpayer.   Other arguments and
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assertions by petitioner are similarly irrelevant and lacking in

merit.

                                        Decision will be entered

                                   under Rule 155.
