                   T.C. Summary Opinion 2010-88



                      UNITED STATES TAX COURT



         RICHARD G. AND SUZUN J. ABBOTT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22749-09S.             Filed June 29, 2010.



     Richard G. and Suzun J. Abbott, pro sese.

     Richard W. Kennedy, for respondent.



     GERBER, 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 reviewable by any other court, and




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2007, the taxable year in
issue.
                                 - 2 -

this opinion shall not be treated as precedent for any other

case.

     Respondent determined a $767 deficiency in petitioners’ 2007

Federal income tax based on three adjustments:    (1) Cancellation

of indebtedness income--$4,753; (2) failure to report a State of

Utah tax refund--$216; and (3) premature withdrawal of a pension,

along with a section 72(t) 10-percent additional tax.2    We

consider whether petitioners had income from cancellation of

indebtedness and a State income tax refund for 2007.

                            Background

     Petitioners resided in Utah at the time their petition was

filed.    Petitioners claimed a $2,759 deduction for Utah State

income tax as part of the itemized deductions claimed on Schedule

A, Itemized Deductions, of their 2006 joint Federal income tax

return.    Petitioners paid $800 in 2006 Utah State income tax

sometime during 2007 and received a $216 refund of 2006 Utah

State income tax in 2007.    Petitioners did not include the $216

in income on their 2007 Federal tax return.    Petitioners did not

itemize deductions on their 2007 Federal tax return.     Respondent

determined that petitioners must include the $216 in income for

their 2007 tax year.




     2
      Petitioners conceded the premature withdrawal and related
additional tax adjustment.
                                 - 3 -

     Petitioner Suzun J. Abbott (Mrs. Abbott) borrowed money from

Commonwealth Central Credit Union (Commonwealth), a California

corporation.   On account of her poor financial condition Mrs.

Abbott stopped making payments on the loan from Commonwealth

during 2003 when her loan balance was $4,753.43.     Mrs. Abbott

turned her financial matters over to Homeland Financial Services,

Inc. (Homeland), to act on her behalf with respect to resolving

her debts with various creditors.

     During 2003 and 2004 Commonwealth placed Mrs. Abbott’s loan

in delinquent status and attempted collection.     Her loan was

placed in “defaulted status” during 2004.     Commonwealth canceled

Mrs. Abbott’s outstanding debt of $4,753.43 during 2007 and

issued her a Form 1099-C, Cancellation of Debt, reflecting

cancellation of debt in that amount.     It was Commonwealth’s

approach to extinguish or cancel debt when no payment was

received for 3 years and the obligation was no longer

collectible.   Petitioners did not report the $4,753.43 in income

on their 2007 tax return.    Respondent determined that the

$4,753.43 was income from cancellation of indebtedness for

petitioners’ 2007 tax year.

                            Discussion

     Initially, we address petitioners’ contention that the

burden of proof should be shifted to respondent under section

7491.   Respondent contends that petitioners did not comply with
                               - 4 -

the prerequisites of section 7491 and that the burden did not

shift.

     Section 7491(a) shifts the burden to the Commissioner where

taxpayers can show that they complied with substantiation

requirements, maintained required records, and generally

cooperated with the Commissioner.   Petitioners did not provide

documents or substantiation to respondent or the Court in support

of their positions.   Because those requirements were not met, the

burden remains on petitioners to show that respondent erred in

the determination of the 2007 income tax deficiency.

     Petitioners contend that they are not required to include in

income on their 2007 Federal tax return the $216 Utah State

income tax refund received in 2007.    Petitioners refer the Court

to material concerning the “tax benefit rule” and respondent’s

instructions and forms for computing the amount of State tax

refund includable in income.   Respondent agrees that the tax

benefit rule applies, but contends that under that rule

petitioners are required to include the $216 in their 2007

income.

     The tax benefit rule provides that if an amount is deducted

from income in one year and a part or all of the amount is

recovered in a later year, then the recovery is treated as income

in the year received to the extent the deduction reduced the

amount of tax imposed.   Sec. 111(a); Francisco v. Commissioner,
                                - 5 -

119 T.C. 317, 333-334 (2002), affd. 370 F.3d 1228 (D.C. Cir.

2004); Kadunc v. Commissioner, T.C. Memo. 1997-92; see Hillsboro

Natl. Bank v. Commissioner, 460 U.S. 370, 377 (1983).    Because

petitioners deducted Utah State income tax on their 2006 Federal

return, the $216 refund of Utah State tax received in 2007 is

includable in income on their 2007 Federal tax return.

     Petitioners make two arguments.    First, they argue that the

$216 refund should be includable only if they claimed a deduction

for Utah State income tax during or for 2007, which they did not.

Second, they argue that payment of $800 of their 2006 Utah State

income tax and the receipt of the refund both occurred in the

same year--2007.    Both of petitioners’ arguments concern the

matching of the deductions and income in the same accounting

period.   That, however, is not how the tax benefit rule works.

Because petitioners received a benefit by deducting Utah State

income tax on their 2006 Federal tax return, petitioners must

include any refund (for which they had received a prior year

benefit) of the Utah State income tax received during 2007 in

income on their 2007 Federal tax return irrespective of whether

they claimed a Utah State income tax deduction on their 2007

Federal return.    Accordingly, we hold that petitioners should

have included the $216 Utah State income tax refund in income on

their 2007 Federal return.
                                - 6 -

     Cancellation or discharge of indebtedness results in

includable income in the year of the cancellation.    Sec.

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

Section 108 provides for certain circumstances where income from

the cancellation of indebtedness may be excluded from gross

income.   Petitioners argue that the debt here was effectively

canceled during 2003 or 2004 and not during 2007.    They also

contend that Homeland had consolidated Mrs. Abbott’s debt and

reached some agreement with Commonwealth before 2007.

Petitioners do not rely on the provisions of section 108.

     Commonwealth canceled Mrs. Abbott’s debt in 2007, 3 years

after she stopped making payments and the obligation was

classified as in default.    Respondent contends that petitioners

failed to offer any independent evidence showing that the

Commonwealth debt was settled or written off before 2007.

Respondent also argues that Commonwealth’s approach to writing

off debt after 3 years is in accord with California State law.

     Commonwealth was a California corporation, and the law of

that State provides that suit to enforce a written obligation

must be commenced within 4 years of the default.    Cal. Civ. Proc.

Code sec. 337 (West 2006).    Further, where a debt is payable in

monthly installments, the period of limitations on enforced

collection begins to run on each installment from the time action

could have been instituted.    Bissell v. Forbes, 82 P. 698 (Cal.
                                 - 7 -

Ct. App. 1905).   Commonwealth’s actions in this case are in

accord with the above-referenced statutory provision and case

precedent.

     Petitioners’ argument that Homeland resolved the

Commonwealth obligation before 2007 fails for lack of credible

evidence supporting their contention.       The record shows that

Commonwealth issued a Form 1099-C and did not extinguish or

cancel the indebtedness before 2007.       Accordingly, petitioners

were obligated to report the income from cancellation of

indebtedness.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
