                           T.C. Summary Opinion 2015-15



                           UNITED STATES TAX COURT



                  SUZANNE MOORE BACON, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28012-09S.                          Filed March 2, 2015.



      Suzanne Moore Bacon, pro se.

      Jeremy D. Cameron, for respondent.



                                SUMMARY OPINION


      ARMEN, 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.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, all subsequent section references are to the
                                                                        (continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      Respondent determined a deficiency in petitioner’s Federal income tax for

2007 of $1,012.

      The sole issue for decision is whether petitioner received income in 2007

from cancellation of indebtedness (COI). We hold that she did not.

                                    Background

      All of the facts have been stipulated, and they are so found.

      At the time that the petition was filed, petitioner resided in the State of

Florida.

1994 Northridge Earthquake

      Following the earthquake that occurred in Northridge, California, in mid-

January 1994, petitioner applied to the Federal Emergency Management Agency

(FEMA) for disaster assistance funds to make repairs on a residence on Mayall

Street in Northridge. At the time of her application she represented to FEMA that

the Mayall Street property was her primary residence.




      1
       (...continued)
Internal Revenue Code in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                        -3-

      In late January 1994 petitioner received disaster assistance funds from

FEMA totaling $3,450 to repair earthquake damage sustained at the Mayall Street

address. FEMA subsequently determined that such property did not qualify as

petitioner’s primary residence and that petitioner was therefore not eligible to

receive assistance. In October 1994 FEMA notified petitioner of its determination

and sought to recoup the disaster assistance funds that petitioner had previously

received. Petitioner did not dispute FEMA’s determination, nor did she return any

of the disaster assistance funds to FEMA.

FEMA’s Efforts To Recoup the Disaster Assistance Funds

      Between January 1995 and September 1997 FEMA sent petitioner eight

letters and left four voicemail messages seeking to collect the amount due. When

petitioner did not make any payments during that period, FEMA ultimately

prepared a Claims Collection Litigation Report (CCLR) in October1997 and

referred petitioner’s account to the Department of Justice (DOJ) for judicial

enforcement of its claims. The CCLR stated that petitioner’s default date was

January 27, 1995, and that the Government’s claim would expire on January 27,

2001, six years after the original default. This was consistent with the statute

limiting the time for the Government to commence an action to recover the debt.
                                         -4-

28 U.S.C. sec. 2415 (2006) (discussed below). The DOJ never commenced any

suit or initiated any other action to recover the funds.

      In February 2008, after petitioner’s account had remained dormant for over

10 years, FEMA mailed petitioner a Form 1099-C, Cancellation of Debt, reporting

discharge of indebtedness of $6,297 for 2007. Such amount represented the

principal amount initially distributed to petitioner in January 1994 plus the interest

and penalties accrued through 2007. Petitioner did not report any COI on her

timely filed Federal income tax return for 2007.

Notice of Deficiency

      In August 2009 respondent determined a deficiency of $1,012 for 2007 by

increasing petitioner’s income by the amount reported on the aforementioned

Form 1099-C. Petitioner responded by filing a petition for redetermination with

this Court. Subsequently, petitioner filed a petition with the bankruptcy court, and

proceedings in this Court were stayed from October 2010 through September

2013. See 11 U.S.C. sec 362(a)(8) (2006). The Internal Revenue Service did not

pursue a claim relating to the COI in the bankruptcy court. Cf. sec. 6871(b).

                                      Discussion

      The Court decides the issue in this case on the basis of the evidence and

without regard to either the burden of production, see sec. 6201(d); Del Monico v.
                                       -5-

Commissioner, T.C. Memo. 2004-92, or the burden of proof, see Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Blohm v. Commissioner, 994 F.2d

1542, 1548-1549 (11th Cir. 1993), aff’g T.C. Memo. 1991-636; cf. sec. 7491(a).

Cancellation of Indebtedness Income

       Section 61 generally defines gross income as “all income from whatever

source derived”. Section 61(a)(12) specifically provides that gross income

includes income from the discharge of indebtedness, commonly referred to as

cancellation of indebtedness, or COI, income. See Gitlitz v. Commissioner, 531

U.S. 206, 213 (2001); United States v. Kirby Lumber Co., 284 U.S. 1 (1931). COI

generally produces income in an amount equal to the difference between the

amount due on the obligation and the amount paid for the discharge. See Babin v.

Commissioner, 23 F.3d 1032, 1034 (6th Cir. 1994), aff’g T.C. Memo. 1992-673.

The rationale of this principle is that COI provides the debtor with an economic

benefit that is equivalent to income. United States v. Kirby Lumber Co., 284 U.S.

at 3; see Friedman v. Commissioner, 216 F.3d 537 (6th Cir. 2000), aff’g T.C.

Memo. 1998-196; Cozzi v. Commissioner, 88 T.C. 435, 445 (1987); see also sec.

108.

       The question as to the year in which a taxpayer realizes COI income is one

of fact to be determined on the basis of the evidence. See Policy Holders Agency,
                                          -6-

Inc. v. Commissioner, 41 T.C. 44, 47 (1963); Callan Court Co. v. Commissioner,

T.C. Memo. 1965-261. A debt is deemed discharged (and COI income is

generated) the moment it becomes clear that such debt will never be repaid. Cozzi

v. Commissioner, 88 T.C. at 445. Determining when that moment occurs requires

a practical assessment of the facts and circumstances. Id. “Any ‘identifiable

event’ which fixes the [creditor’s] loss with certainty may be taken into

consideration.” Id. (citing United States v. S.S. White Dental Mfg. Co., 274 U.S.

398 (1927)); Kleber v. Commissioner, T.C. Memo. 2011-233, 2011 WL 4485037.

The Court has acknowledged that it is often impossible to find only one event that

clearly establishes the moment at which a debt is discharged, such as pinpointing

the moment when property has been abandoned. See Cozzi v. Commissioner, 88

T.C. at 445. That is not the case here.

      There exist a number of identifiable events, any one of which could

reasonably indicate that a debt has been discharged. Section 1.6050P-1(b)(2)(i)

and (iv), Income Tax Regs., for example, provides an exclusive list of eight

“identifiable events” under which debt is discharged for information reporting

purposes. When one or more of these identifiable events has occurred, the creditor

must issue a Form 1099-C reporting the existence of COI income. Accordingly,

we address the identifiable event that informs our decision.
                                         -7-

Issuance of Form 1099-C

       In February 2008 FEMA issued a Form 1099-C reporting the cancellation in

2007 of indebtedness petitioner incurred in 1995. Respondent contends that

petitioner’s debt was discharged in 2007 because FEMA issued the Form 1099-C

for that year. Although the issuance of a Form 1099-C by a creditor is indicative

of the COI, it is not dispositive of that matter. Kleber v. Commissioner, 2011 WL

4485037, at *3. In the instant case, it appears that the issuance of the Form 1099-

C in 2007 was in error because, as discussed below, petitioner’s debt was in fact

discharged by operation of law some six years earlier, on January 27, 2001.

28 U.S.C. sec. 2415

       Between January 1995 and October 1997, FEMA attempted to collect the

debt from petitioner through administrative procedures. On October 9, 1997,

FEMA referred the matter to the DOJ for judicial enforcement of its claims against

petitioner. According to the CCLR that FEMA prepared to accompany the

referral, the period of limitations on petitioner’s debt would expire on January 27,

2001, six years after the date of petitioner’s original default. The six-year

limitation period derives from 28 U.S.C. sec. 2415, which provides in relevant part

that
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      every action for money damages brought by the United States or an
      officer or agency thereof which is founded upon any contract express
      or implied in law or fact, shall be barred unless the complaint is filed
      within six years after the right of action accrues * * *.

      As a general proposition, the sovereign is not subject to time limitations on

its actions. BP Am. Prod. Co. v. Burton, 549 U.S. 84, 95 (2006); Guaranty Trust

Co. v. United States, 304 U.S. 126 (1938). However, in enacting 28 U.S.C. sec.

2415, Congress bound the United States to act promptly in protecting its financial

interest and affirmatively barred actions not brought within the specified six-year

period. Accordingly, the expiration of the period of limitations on January 27,

2001, extinguished the right of the United States to collect the debt and

extinguished the debt as a result.2

      Section 1.6050P-1(b)(2)(i)(C), Income Tax. Regs., recognizes this situation

as an identifiable event that cancels indebtedness, generates COI income, and

requires the issuance of a Form 1099-C. Enumerated as the third of eight

“identifiable events” giving rise to COI income, subdivision (i)(C) provides:




      2
        Although 28 U.S.C. sec. 2415(a) (2006) bars the government from filing a
complaint greater than six years after the right of action accrues, it does not
prohibit the assertion of the obligation as a counterclaim in a suit brought against
the United States or by offset. See 28 U.S.C. sec. 2415(f); Thomas v. Bennett, 856
F.2d 1165, 1169 (8th Cir. 1988). However, neither of these exceptions is
applicable in the instant case.
                                        -9-

      (C) A cancellation or extinguishment of an indebtedness upon the
      expiration of the statute of limitations for collection of an
      indebtedness, subject to the limitations described in paragraph
      (b)(2)(ii) of this section, or upon the expiration of a statutory period
      for filing a claim or commencing a deficiency judgment proceeding;
      [Emphasis added.]

      The Court recognizes that, in general, the expiration of a period of

limitations on collection of indebtedness does not extinguish an underlying debt

obligation but simply provides an affirmative defense for the debtor in an action

by the creditor. Miller Trust v. Commissioner, 76 T.C. 191, 195 (1981). This is

confirmed by section 1.6050P-1(b)(2)(ii), Income Tax Regs. However, the instant

case deals with the second clause of the subdivision, “expiration of a statutory

period for filing a claim”. Sec. 1.6050P-1(b)(2)(i)(C), Income Tax Regs. That

clause is not so limited.

      Petitioner defaulted on her debt to FEMA in or around January 1995.

FEMA curtailed its efforts to collect the debt administratively and referred the

matter to the DOJ in 1997. The period of limitations for filing an action expired in

January 2001, and the underlying debt was extinguished when the United States

became time barred from collection through judicial enforcement. Because the

statutory period for filing an action had expired in 2001, there was no debt in
                                      - 10 -

existence when FEMA issued the Form 1099-C regarding calendar year 2007, and

the Form 1099-C appears to have been issued in error. See id.

                                   Conclusion

      Petitioner did not receive COI income from FEMA in 2007. Accordingly,



                                                     Decision will be entered

                                               for petitioner.
