                  T.C. Summary Opinion 2005-35



                     UNITED STATES TAX COURT



                 GERALD A. BUNKER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2703-04S.                  Filed March 30, 2005.


     Gerald A. Bunker, pro se.

     Daniel N. Price, for respondent.



     GOLDBERG, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax of $4,867 and an addition to tax of $195 under section

6651(a)(1) for the taxable year 2001.

     After concessions, the issue remaining for decision is

whether certain payments made by insurance companies, during the

year in issue, of indebtedness owing by petitioner on credit

cards constitute gross income in the amount of $15,8841 under

section 61(a).

                            Background

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

The stipulation of facts, stipulation of settled issues, and the

attached exhibits are incorporated herein by this reference.    At

the time of filing his petition, petitioner resided in Schertz,

Texas.

     Prior to 2001, petitioner was employed in a civilian

position at Kelly Air Force Base (Kelly AFB) in San Antonio,

Texas.   While employed at Kelly AFB, petitioner availed himself

of the opportunity to purchase credit card insurance from

American Security Insurance Company (American Security) and

Capital One Bank (Capital One) that provided for the payment of




     1
      Respondent conceded $596 of this amount, as explained
later.
                                 - 3 -

portions of indebtedness owing on petitioner’s credit cards in

the event of death, disability, or unemployment.2

     Due to the Defense Base Closure and Realignment Commission

which closed Kelly AFB in 2001, petitioner lost his employment at

Kelly AFB on November 6, 2000.    Because of petitioner’s

unemployment, petitioner satisfied one of the contingencies

provided by the credit card insurance policies he carried.    Thus,

petitioner applied for insurance benefits pursuant to the credit

card insurance policies from American Security and Capital One.

Petitioner remained unemployed for most of 2001.    Accordingly,

payments were made during 2001 by American Security and Capital

One to the banks that had issued the credit cards in partial

payment of amounts due by petitioner on his credit cards.    During

2001, petitioner owed approximately $45,000 in credit card debt.

     Pursuant to the terms of the credit card insurance

contracts, American Security paid $11,396 to the applicable bank

in partial payment of petitioner’s credit card debt and Capital

One paid $4,448 to the applicable bank in partial payment of

petitioner’s credit card debt.    As a result of paying

petitioner’s credit card obligations, American Security and

Capital One reported these payments to the Internal Revenue




     2
      The record does not reflect the amounts paid as premiums
for such insurance or how such premiums were paid.
                                - 4 -

Service (IRS) and issued petitioner information returns3 as

follows:

           Issuer          Reporting form            Amount

     American Security          1099-C            $11,396.09
     Capital One Bank      1099-MISC, Box 7        $4,448.00
       TOTAL                                      $15,844.09

However, at trial respondent produced evidence to substantiate

payments from American Security of only $10,800.    Respondent’s

counsel admitted that he did not know how the amount of $11,3964

was calculated by American Security.    Therefore, respondent

conceded the difference in payments of $596.    As a result,

$15,248 is the total amount of unreported income remaining at

issue.    Petitioner did not include these amounts as income in his

Federal income tax return for 2001.     In the notice of deficiency,

respondent determined that these amounts constituted gross

income.




     3
      Petitioner claims that he did not receive the applicable
Forms 1099; however, petitioner admitted that he was aware that
such payments were being made during tax year 2001.
     4
      Amount rounded to the nearest dollar.
                              - 5 -

                           Discussion5

     Respondent determined that petitioner failed to report

income in tax year 2001 in the amount of $15,8446.   However,

petitioner argues that such payments were made pursuant to credit

card insurance policies and, as such, are not income.     Petitioner

contends that the factual situation here is analogous to the

situation where an insured automobile is damaged in an accident.

The insurance company insuring the vehicle pays the body shop for

the cost of the repairs, and, in such a situation, the payments

do not constitute gross income to the vehicle owner.

     Section 61(a) defines gross income as “all income from

whatever source derived,” unless otherwise provided.    The Supreme

Court has consistently given this definition of gross income a

liberal construction “in recognition of the intention of Congress

to tax all gains except those specifically exempted.”

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955); see

also Roemer v. Commissioner, 716 F.2d 693, 696 (9th Cir. 1983),

revg. 79 T.C. 398 (1982) (all realized accessions to wealth are

presumed taxable income, unless the taxpayer can demonstrate that

an acquisition is specifically exempted from taxation).


     5
      We decide the issue in this case without regard to the
burden of proof. Accordingly, we need not decide whether the
general rule of sec. 7491(a)(1) is applicable in this case. See
Higbee v. Commissioner, 116 T.C. 438 (2001).
     6
      As discussed previously, due to concessions, the amount of
unreported income in issue is $15,248.
                                - 6 -

Moreover, section 61(a)(12) provides that gross income includes

income from discharge of indebtedness.

     The unemployment condition of American Security’s and

Capital One’s insurance policies was satisfied, and petitioner,

as a result, realized economic benefits by the amount of the

payments the insurance companies paid towards petitioner’s credit

card liabilities during 2001.   As a result of the payments made

by the insurance companies, petitioner was relieved of the

obligation of paying $10,800 and $4,448 to the issuers of his

credit cards.   In Amos v. Commissioner, 47 T.C. 65, 70 (1966),

this Court stated:

     Although petitioner did not receive the amount directly from
     John Hancock Mutual Life Insurance Co., it is well settled
     that income is not limited to direct receipt of cash, Crane
     v. Commissioner, 331 U.S. 1 (1947); and that the payment of
     a legal obligation of a taxpayer is income to him even
     though such income is not actually received by him, Old
     Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929);
     and Schaeffer v. Commissioner, 258 F.2d 861, 864 (C.A. 6,
     1958), certiorari denied 360 U.S. 917. * * *

The Court, therefore, rejects petitioner’s arguments.   All of the

charges on petitioner’s credit cards represented economic

benefits petitioner received.   Petitioner was relieved of his

liability to the extent of the amount paid by the insurance

companies during 2001.   Respondent, therefore, is sustained.

     Petitioner incorrectly contends that the insurance payments

on his credit cards are analogous to insurance recovery amounts

for damaged property (such as automobiles) where, in the latter
                                - 7 -

instance, the insurance benefits do not constitute gross income.

That argument is inappropriate in the present case.       The general

rule is that the taxability of recovery payments depends upon the

nature of the claim.    If the recovery represents damages for lost

profits, the payment is considered income; however, if the

recovery represents a replacement of capital destroyed or

damaged, the recovery does not constitute income to the extent

the recovery does not exceed the basis of the damaged or

destroyed property.    In the latter case, the recovery is a

restoration or return of capital.       State Fish Corp. v.

Commissioner, 48 T.C. 465, 473 (1967).      In the present case,

petitioner had no basis in his credit card liability.         Therefore,

the payments by the insurance companies were not a recovery or

restoration of capital.    These payments were income.7

                             Conclusion

     We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.



     7
      We note that the amounts reported as income could be
reduced or offset by the premiums paid by petitioner for the
insurance coverage for the benefits payable arising during the
period of petitioner’s unemployment. However, petitioner has
failed to establish the total amount of the premiums paid for the
year at issue or the portion of such premiums allocable to the
unemployment risk (as distinguished from the premiums
attributable to death or disability); therefore no such offset
will be allowed.
                             - 8 -


    Reviewed and adopted as the report of the Small Tax Case

Division.


                                     Decision will be entered

                             under Rule 155.
