                  T.C. Summary Opinion 2011-62



                     UNITED STATES TAX COURT



JOHN JOSEPH MARTIN, JR., AND MAUREEN ANN MARTIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21247-09S.               Filed May 19, 2011.



     John Joseph Martin, Jr., and Maureen Ann Martin, pro sese.

     Richard T. Cummings, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.   Pursuant to

section 7463(b), the decision to be entered is not reviewable by

any other court, and this opinion shall not be treated as

precedent for any other case.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code,
                               - 2 -

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent determined a deficiency of $3,604 in petitioners’

2006 Federal income tax.   The issues for decision are:

(1) Whether John Joseph Martin, Jr. (petitioner), received

cancellation of indebtedness income of $27,821 and (2) if so, in

what year the cancellation of indebtedness income is required to

be reported.

                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Connecticut at the time the petition was filed.

     Petitioner attended college in the early 1980s.   Petitioner

borrowed $19,986.72 from the Connecticut Student Loan Foundation

(CSLF) in order to finance his college education.    At some point

petitioner became delinquent in his loan payments.   In 1988 CSLF

filed a complaint in the Connecticut Superior Court.   Petitioner

received personal service of the complaint, failed to appear at

the judicial proceeding, and a default judgment was entered on

May 17, 1989, for $27,655.301 plus court costs of $166.30.


     1
      CSLF’s Motion for Judgment after Default and the
accompanying affidavit requested a default judgment of
$27,655.45. This amount includes the principal of $19,986.72,
accrued interest of $4,061.50, and attorney’s fees of $3,607.23.
The record does not reflect the reason for the discrepancy.
                               - 3 -

     Petitioner made three payments after the default judgment

was entered, totaling $862.50.2   CSLF used at least four

collection agencies to facilitate collection of the judgment.

When one such agency attempted to collect through wage

garnishment in 2004, petitioner requested a pregarnishment

hearing.   Petitioner initially alleged he had repaid the loan;

however, he abandoned that argument after CSLF provided detailed

information about the loan and the various actions to collect.

Throughout 2005 petitioner and CSLF had discussions concerning a

lump-sum payment to pay the debt, and the parties ultimately came

to an agreement.3   On December 28, 2005, petitioner mailed CSLF a

personal check for $45,000 to extinguish his then-outstanding

liability of approximately $73,258.4   Petitioner enclosed with

the check a letter which set out the following condition:    “These

funds may only be negotiated by CSLF with the clear agreement

that upon clearance of these funds, CSLF shall provide me with a




     2
      Petitioner made three payments: $172.50 on June 8, 1989,
$230 on Jan. 24, 1990, and $460 on Mar. 28, 1990.
     3
      Petitioner missed several deadlines imposed by CSLF for
making a lump-sum payment with a bank or cashier’s check. The
only terms discussed were the amount of the lump-sum payment, the
date of payment, and the method of payment.
     4
      The balance due on the default judgment as of Dec. 31,
2005, was $73,258.72. The parties stipulated that Connecticut
law provides for postjudgment interest at the rate of 10 percent
annually and that judgments are enforceable for 20 years.
                                 - 4 -

general release and satisfaction evidencing full and final

settlement with regard to this matter.”

     In February 2006 CSLF filed documents in the Connecticut

Superior Court evidencing petitioner’s satisfaction of the

judgment and a release of CSLF’s claim against petitioner.     CSLF

issued a Form 1099-C, Cancellation of Debt, to petitioner for

2006 reporting income of $27,821.5

     Petitioners did not report income from cancellation of

indebtedness on their 2006 Federal income tax return.     On June 8,

2009, the IRS issued to petitioners a notice of deficiency for

the taxable year 2006 determining among other things an increase

in tax due to cancellation of indebtedness.     On September 4,

2009, petitioners filed a petition disputing the deficiency.

                               Discussion

     In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and the taxpayer bears

the burden of showing that the determination is in error.     Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Under

certain circumstances, the burden may shift where a taxpayer

introduces credible evidence with respect to any factual issue

relevant to ascertaining the income tax liability of the

taxpayer.   Sec. 7491(a)(1).    Petitioners have neither alleged


     5
      Although CSLF canceled approximately $28,258 of debt, CSLF
issued the Form 1099-C showing $27,821. The record does not
establish the reason for the discrepancy.
                                 - 5 -

that section 7491(a) applies nor established their compliance

with the substantiation and recordkeeping requirements.    See sec.

7491(a)(2)(A) and (B).

     Gross income includes all income from whatever source

derived, including income from discharge of indebtedness.       Sec.

61(a)(12); United States v. Kirby Lumber Co., 284 U.S. 1 (1931).

A debt cancellation results in an accession to wealth by

effecting a freeing of assets previously offset by the liability

arising from the indebtedness.     United States v. Kirby Lumber

Co., supra at 3; Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).

The amount of the income includable generally is the difference

between the face value of the debt and the amount paid in

satisfaction of the debt.6   Babin v. Commissioner, 23 F.3d 1032,

1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.    The income is

recognized in the year cancellation occurs.     Montgomery v.

Commissioner, 65 T.C. 511, 520 (1975).

A.   Settlement

     If the cancellation of all or part of a debt is made to

settle a dispute concerning the debt, no income from cancellation

of indebtedness arises.   Zarin v. Commissioner, 916 F.2d 110, 115

(3d Cir. 1990), revg. 92 T.C. 1084 (1989); N. Sobel, Inc. v.

Commissioner, 40 B.T.A. 1263, 1265 (1939); see also Colonial Sav.


     6
      The face value of petitioner’s debt was in excess of
$72,000 because of interest on the default judgment. Petitioner
paid $45,000 to satisfy the debt.
                                 - 6 -

Association v. Commissioner, 85 T.C. 855, 862-863 (1985), affd.

854 F.2d 1001 (7th Cir. 1988).    Settlement in such circumstances

does not occasion a freeing of assets and accession to income.

N. Sobel, Inc. v. Commissioner, supra at 1265.

     A payment of a debt for an amount less that the amount

claimed by the creditor does not in and of itself constitute

evidence of a good-faith dispute concerning the debt.   See Rood

v. Commissioner, T.C. Memo. 1996-248, affd. without published

opinion 122 F.3d 1078 (11th Cir. 1997).   Petitioners bear the

burden of showing that the settlement with CSLF did not result in

income from the cancellation of indebtedness.    See Rule 142(a).

Petitioner presented two primary arguments to support the theory

that the payment represented a legitimate dispute as to the

amount of the debt.

     Petitioner asserted first that he was entitled to student

loan forgiveness on the basis of his residency in Connecticut

when he entered the military after the Vietnam War.   Petitioner

provided no evidence to substantiate such an agreement or plan of

student loan forgiveness on this basis.   Cf. sec. 108(f).

     Petitioner asserted second that CSLF was not entitled to

collect on the debt on the basis of the default judgment and

postjudgment interest.   Rather, petitioner asserted that CSLF was

entitled to collect only on the basis of the original student

loan, a liability petitioner estimated to be $45,000.   Petitioner
                                - 7 -

provided no evidence to support a finding that the default

judgment is void or that the statutory interest on default

judgments as provided by Connecticut State law is inapplicable.

The record in fact reflects that petitioner was personally served

with the complaint filed in the Connecticut Superior Court case

and that a default judgment was entered when he failed to appear.

     Petitioner did not present any evidence that the basis of

the agreement with CSLF to extinguish the debt for less than the

full amount was based on these positions or any good-faith claim

that he was not liable for some or all of the debt.    On this

record, we conclude petitioner did not have a good-faith dispute

with respect to the indebtedness with CSLF in the amount claimed

by the creditor.

B.   Year of Cancellation

     The moment it becomes clear that a debt will never have to

be paid, that debt must be viewed as having been discharged.

Cozzi v. Commissioner, supra.    The test for determining that

moment requires a practical assessment of the facts and

circumstances relating to the likelihood of payment.    Brountas v.

Commissioner, 74 T.C. 1062, 1074 (1980), supplementing 73 T.C.

491 (1979), vacated and remanded on other grounds 692 F.2d 152

(lst Cir. 1982), affd. in part and revd. in part on other grounds

sub nom. CRC Corp. v. Commissioner, 693 F.2d 281 (3d Cir. 1982);

see Bickerstaff v. Commissioner, 128 F.2d 366, 367 (5th Cir.
                                - 8 -

1942), revg. 44 B.T.A. 457 (1941); Kent Homes Inc. v.

Commissioner, 55 T.C. 820, 828-831 (1971), revd. on other grounds

455 F.2d 316 (l0th Cir. 1972); Cotton v. Commissioner, 25 B.T.A.

1158 (1932), affd. 68 F.2d 436 (D.C. Cir. 1933).     Any

identifiable event which fixes the loss with certainty may be

taken into consideration.   United States v. S.S. White Dental

Manufacturing Co., 274 U.S. 398 (1927).

     Petitioner asserts that any cancellation of indebtedness

income should be required to be reported for 2005, when he sent

the lump-sum payment to CSLF.   Respondent asserts that the income

is required to be reported for 2006, the year the release and

satisfaction of judgment were filed with the Connecticut Superior

Court and the year the Form 1099-C was issued.

     The parties provided documents showing that the release and

satisfaction of judgment were both executed and filed with the

Connecticut Superior Court in 2006.     Once CSLF filed the release

and satisfaction of judgment with the Connecticut Superior Court,

it became clear that the debt would not have to be repaid and was

thus canceled.   See Cozzi v. Commissioner, supra.

     The issuance of a Form 1099-C is an identifiable event, but

it is not dispositive of an intent to cancel indebtedness.     Owens

v. Commissioner, T.C. Memo. 2002-253, affd. in part, revd. in

part and remanded 67 Fed. Appx. 253 (5th Cir. 2003).

Additionally, an identifiable event includes an agreement to
                                 - 9 -

discharge the indebtedness at less than full consideration.       See

sec. 1.6050P-1(b)(2)(i)(F), Income Tax Regs.

     Petitioner argues that any cancellation occurred in 2005,

relying on CSLF’s attorney’s letter stating that CSLF’s

acceptance would be withdrawn at midnight December 31, 2005.

That letter also stated that CSLF had been very patient with

petitioner and would “in all likelihood” withdraw its acceptance

of petitioner’s settlement offer if funds were not received by

December 31, 2005.   In fact CSLF had extended the deadline for

payment multiple times.   There is no evidence that CSLF accepted

the condition set forth in petitioner’s December 28, 2005, letter

before January 1, 2006.   The record is insufficient to establish

that the parties had a binding agreement in 2005.

     Taking into account all of the facts and circumstances

surrounding this agreement and ultimate cancellation of

indebtedness, we conclude that the cancellation occurred in 2006.

     We have considered all of petitioners’ contentions and

arguments that are not discussed herein, and we conclude they are

without merit, irrelevant, and/or moot.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
