                               T.C. Memo. 2017-32



                         UNITED STATES TAX COURT



       DAVID W. SCHIEBER AND JANET L. SCHIEBER, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 21690-14.                         Filed February 9, 2017.



      Steven Ray Mather, for petitioners.

      Lori A. Amadei, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: Respondent (hereinafter the IRS) issued the

petitioners, David W. Schieber and Janet L. Schieber, a notice of deficiency for the

2009 tax year. In the notice, the IRS determined that the Schiebers (1) had a

$129,509 deficiency in income tax and (2) were liable for a $25,902 section-6662
                                         -2-

[*2] penalty.1 The Schiebers timely filed a petition under section 6213(a) for

redetermination of the deficiency and the penalty.2 We have jurisdiction under

section 6214(a).

      This case involves the tax treatment of a canceled debt. Section 61(a)(12)

defines “gross income”3 to include income from cancellation of debt.4 This rule is

subject to certain exceptions found in section 108(a)(1). See Gitlitz v.

Commissioner, 531 U.S. 206, 213 (2001). One such exception is in section

108(a)(1)(B), which excludes from gross income any amount that would otherwise

be includable by reason of the cancellation of the taxpayer’s debt, in whole or in

part, if the cancellation occurs when the taxpayer is insolvent. Section 108(a)(3)


      1
       Unless otherwise indicated, all references to sections are to the Internal
Revenue Code in effect for the 2009 tax year. All references to Rules are to the
Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the
nearest dollar.
      2
        The Schiebers resided in California when they filed the petition. Therefore,
an appeal of our decision in this case would go to the U.S. Court of Appeals for
the Ninth Circuit unless the parties designate the Court of Appeals for another
circuit in writing. See sec. 7482(b)(1) and (2).
      3
       The concept of gross income is significant because taxable income is the
difference between gross income and deductions. Sec. 63(a). The amount of tax
depends on the amount of taxable income. Sec. 1(d). Thus, if an amount is
included in gross income, the tax liability is greater than if it were not included.
      4
       The Internal Revenue Code refers to income from canceled debt as income
from the “discharge of indebtedness”. Secs. 61(a)(12), 108(a)(1).
                                          -3-

[*3] provides that the amount of income excluded under section 108(a)(1)(B)

“shall not exceed the amount by which the taxpayer is insolvent.” The term

“insolvent” is defined by section 108(d)(3) as “the excess of liabilities over the fair

market value of assets.” Whether and by how much a taxpayer is insolvent is

“determined on the basis of the taxpayer’s assets and liabilities immediately

before” the cancellation of debt. Sec. 108(d)(3).

      The sole issue in this case is whether the Schiebers’ interest in a California

Public Employees’ Retirement System (CalPERS) defined benefit pension plan is

considered an asset in determining (1) whether they were insolvent on June 30,

2009, the date the debt was canceled, and (2) the amount of their insolvency.

When the debt was canceled, Mr. Schieber was retired and was receiving monthly

payments under the pension plan. In the event of Mr. Schieber’s death, Mrs.

Schieber had a right to receive the monthly payments. Other than the right to

receive the monthly payments, the Schiebers could not access the value in the

plan. They could not convert their interest in the plan to a lump-sum cash amount,

sell the interest, assign the interest, borrow against the interest, or borrow from the

plan. We therefore hold that the Schiebers’ interest in the pension plan is not an

asset for the purposes of determining whether they were insolvent and the amount

of their insolvency. See id.
                                          -4-

[*4]                            FINDINGS OF FACT

       The parties have agreed to a stipulation of facts. We adopt, as our findings

of fact, the statements in the stipulation of facts. Other findings of fact are based

on documentary evidence stipulated as admissible by the parties.5

The pension plan

       Mr. Schieber worked as a police officer for the city of Bakersfield,

California, for 25 years. He participated in a defined benefit pension plan through

CalPERS. On August 20, 2005, he retired. At retirement he was entitled to

monthly distributions from the pension plan. He started receiving monthly

payments from the pension plan in 2005. The pension plan withheld federal

income tax from the payments. Therefore the payments were net of federal

income tax withholding. If Mr. Schieber had died, Mrs. Schieber would have been

entitled to receive the monthly payments until her death. The Schiebers could not

convert their interest in the pension plan into a lump-sum cash amount, assign the

interest, sell the interest, borrow against the interest, or borrow from the plan.




       5
      Our findings of fact are based on the preponderance of the evidence.
Therefore, it is not necessary to determine which party bears the burden of proof.
Knudsen v. Commissioner, 131 T.C. 185, 189 (2008).
                                         -5-

[*5] The monthly distribution amount increased approximately 2% per year

because of cost of living adjustments. The annual increase took place each May.

For 2009 through 2015 the amounts of the monthly distributions were:

                 Period                              Monthly payment
     Jan. 2009 through Apr. 2009                          $4,986
     May 2009 through Apr. 2010                            5,086
     May 2010 through Apr. 2011                            5,187
     May 2011 through Apr. 2012                            5,291
     May 2012 through Apr. 2013                            5,397
     May 2013 through Apr. 2014                            5,505
     May 2014 through Apr. 2015                            5,615
     May 2015 through Nov. 2015                            5,728

The cancellation of debt on June 30, 2009

      The Schiebers were not in bankruptcy during 2009. On June 30, 2009, Mr.

Schieber was 65 years old and Mrs. Schieber was 61 years old.

      On June 30, 2009, the fair market value of the assets owned by the

Schiebers, other than the interest in the pension plan, was $924,919, as the parties

have stipulated. One of the Schiebers’ assets was a property at 21718 Stockdale

Highway, Bakersfield, California, which had a value of $389,803. The Stockdale

Highway property was not the Schiebers’ primary residence.
                                        -6-

[*6] On June 30, 2009, the Schiebers’ liabilities totaled $1,218,227, as the

parties have stipulated. Among the liabilities was $906,532 of debt secured by the

Stockdale Highway property. The lender (or one of the lenders) of this $906,532

debt was GMAC Mortgage.

      On June 30, 2009, GMAC Mortgage canceled $448,671 of the Schiebers’

debt that was secured by Stockdale Highway property.6 The $448,671 of canceled

debt consisted of $418,596 of principal and $30,076 of interest.7

Tax reporting

      The Schiebers filed a federal income tax return for 2009 using Form 1040,

“U.S. Individual Income Tax Return”. On this return they did not report the

$30,076 of interest canceled by GMAC Mortgage because they never deducted it

and therefore it is not includable in gross income under section 108(e)(2).8 As to

the $418,596 of principal that was canceled, the Schiebers reported that they were



      6
       The record does not reveal whether the $448,671 was the entire debt held
by GMAC Mortgage against the Stockdale Highway property or merely a portion.
We know only that $448,671 is the amount of debt canceled by GMAC Mortgage
that was secured by the property.
      7
      Without rounding the numbers to the nearest dollar, the calculation is
$448,671.44 = $418,595.77 + $30,075.67.
      8
        Sec. 108(e)(2) provides that no income is realized from cancellation of debt
“to the extent that payment of the liability would have given rise to a deduction.”
                                          -7-

[*7] insolvent when this amount was canceled, that the amount of their insolvency

was $346,418, and that therefore $346,418 of the $418,596 of canceled debt was

excludable from income.9 They reported that the remainder of the $418,596, i.e.,

$72,178, was includable in their income.

The notice of deficiency and the positions of the parties

      In the notice of deficiency, the IRS determined that the $30,076 interest

component of the GMAC Mortgage debt cancellation was canceled-debt income.

However, the IRS has conceded that the $30,076 is not includable in income under

section 108(e)(2). Therefore, we need not resolve the question of whether the

Schiebers realized canceled-debt income from the cancellation of the $30,076

interest component.

      In the notice of deficiency, the IRS determined that the entire $418,596

principal component of the GMAC Mortgage debt cancellation was canceled-debt

income. After the Schiebers filed their petition, the Schiebers and the IRS

executed a stipulation of facts, executed a stipulation of settled issues (which

contains concessions), and moved that the case be decided without trial under Rule

122. The Court granted the Rule 122 motion.




      9
          The record does not reveal how the Schiebers calculated the $346,418.
                                         -8-

[*8] The IRS contends that the Schiebers’ interest in the pension plan should be

considered an asset for the purpose of the insolvency exclusion. In the event the

Court considers their interest in the pension plan to be an asset, the Schiebers

concede that they were not insolvent immediately before the cancellation of the

GMAC Mortgage debt and that they would be required to include the entire

$418,596 in their income.

      The Schiebers contend that their interest in the pension plan should not be

considered an asset for the purpose of the insolvency exception. Without the

pension plan, the Schiebers’ assets are stipulated to have been worth $924,919.

Their total debts are stipulated to have been $1,218,227. Thus, without their

interest in the pension plan as an asset, they would be insolvent in the amount of

$293,308 and would be entitled to exclude $293,308 of the $418,596 from their

income. The IRS does not dispute that $293,308 would be the amount of the

exclusion in the event that the Schiebers’ interest in the pension plan is not

considered an asset. The Schiebers originally reported on their return that the

exclusion for insolvency was $346,418, but their position now is that it is

$293,308.
                                         -9-

[*9] The parties’ positions are summarized below:

                                If the interest in the       If the interest in the
                                  pension plan is            pension plan is not
               Item             considered an asset          considered an asset
 Value of assets other
  than interest in plan                $924,919                     $924,919
 Value of interest in plan        Not stipulated               Not stipulated
 Liabilities                           1,218,227                   1,218,227
 Amount of insolvency
  before $418,596 in debt
  principal was canceled          Not insolventa                      293,308
 Portion of $418,596 that
  should be excluded
  from income                            -0-                         293,308
 Portion of $418,596 that
  should be included in
  income                                   418,596                    125,288b
       a
         The parties are in agreement that the Schiebers were not insolvent if the
interest in the pension plan is considered an asset. This agreement implicitly
assumes that the value of the plan, if it is considered an asset, exceeds $293,308.
       b
         $125,288 is the difference between $418,596 and $293,308.

      As explained below, we agree with the Schiebers that their interest in the

pension plan is not an asset for the purpose of the insolvency exclusion. Therefore

they are entitled to exclude $293,308 of the $418,596 of canceled principal from

their income.
                                         -10-

[*10] The IRS concedes that the Schiebers are not liable for the section-6662

penalty. Therefore we need not consider the issue of the Schiebers’ liability for

that penalty.

                                     OPINION

      Section 108(d)(3) provides that a taxpayer is insolvent if, immediately

before the cancellation of debt, the taxpayer’s liabilities exceeded the fair market

value of the taxpayer’s assets. The word “assets” is not defined by the Internal

Revenue Code. Carlson v. Commissioner, 116 T.C. 87, 93 & n.6 (2001). In

Carlson v. Commissioner, 116 T.C. at 104-105, we held that an asset exempt from

creditors could still be an asset under section 108(d)(3) because even an asset

exempt from creditors can give the taxpayer “the ability to pay an immediate tax

on income” from the canceled debt. By contrast, the Schiebers contend that they

could not use their interest in the pension plan to immediately pay a tax liability

because they were entitled only to monthly payments under the plan and could not

convert their interest in the plan to a lump-sum cash amount, sell the interest,

assign the interest, borrow against the interest, or borrow from the plan.

      We first determine whether we should assume that this description of their

rights under the plan is correct. We conclude that it is appropriate to do so. The

IRS does not dispute the Schiebers’ claim that they cannot access the value of the
                                         -11-

[*11] plan beyond collecting their monthly payments. In its answering brief, the

IRS explicitly chooses to dispute the relevancy of the claim, not its accuracy. It

argues that the Schiebers’ right to receive monthly payments causes their interest

in the plan to be considered an asset. In its view, the lack of any other rights does

not matter. We conclude that the IRS has waived any dispute over the correctness

of the Schiebers’ description of their rights under the plan.10 Thus, we consider it

established that: the Schiebers’ interest in the pension plan entitles them only to

monthly payments; the interest cannot be converted to a lump-sum cash amount;

the interest cannot be sold; the interest cannot be assigned; the interest cannot be

borrowed against; and the Schiebers cannot borrow from the plan.

      10
         Although the IRS does not dispute the correctness of the Schiebers’
description of their rights under the plan, the preponderance of the evidence
supports their description. The stipulation of facts states that Mr. Schieber elected
on a retirement form to receive benefits and that he chose the option under which
(1) his wife would receive the same level of monthly benefits if he died and (2) the
benefits would cease at the death of both of them. Furthermore, the record
includes a brochure that, the parties have stipulated, describes some of the
characteristics of Mr. Schieber’s pension plan. This extensive brochure does not
suggest that the Schiebers could convert an interest in the pension plan to a lump-
sum cash amount, sell an interest in the plan, assign an interest in the plan, borrow
against an interest in the plan, or borrow from the plan. Additionally, the
Schiebers’ description of their rights under the plan is consistent with provisions
of the California laws they cite, specifically: Cal. Gov’t Code sec. 21453 (West
2003 & Supp. 2017), which provides that an election to receive benefits under a
CalPERS plan becomes irrevocable 30 days after the first benefit check is
received, and Cal. Gov’t Code sec. 21255 (West 2003), which provides that an
interest in a CalPERS retirement account cannot be assigned.
                                       -12-

[*12] As noted in the paragraph above, the IRS contends the Schiebers’ interest in

the pension plan should be considered an asset because they can use their monthly

payments to pay liabilities. But the test in Carlson v. Commissioner, 116 T.C. at

104-105, is whether the asset gives the taxpayer the ability to pay an “immediate

tax on income” from the canceled debt--not to pay the tax gradually over time. In

Carlson, we held that a commercial fishing license could be an asset because the

license could be used, in combination with other assets, to immediately pay the

income tax on canceled-debt income. Id. By contrast, the Schiebers’ interest in

the pension plan cannot be used to immediately pay the income tax on canceled-

debt income. Therefore, we hold that the Schiebers’ interest in the pension plan is

not an asset within the meaning of section 108(d)(3).11

      In reaching our holding, we have considered all arguments made, and, to the

extent not mentioned, we conclude that they are moot, irrelevant, or without merit.




      11
        The IRS contends that Shepherd v. Commissioner, T.C. Memo. 2012-212,
a nonprecedential case, supports its view that the Schiebers’ interest in the
CalPERS pension plan is an asset. The taxpayer in Shepherd was a township
employee who had a pension with the New Jersey Public Employees Retirement
System. Id., slip op. at 12. The Court found that he could borrow from his
pension against his accumulated contributions. Id. at 13-14. It held that the
amount that he could borrow was an asset under sec. 108(d)(3). Id. at 14. The
Schiebers, by contrast, could not borrow from the pension. Shepherd is therefore
distinguishable.
                                   -13-

[*13] To reflect the foregoing,


                                          Decision will be entered under

                                  Rule 155.
