                      T.C. Memo. 2004-37



                    UNITED STATES TAX COURT



H. DEE JOHNSON, JR. AND MARY L. JOHNSON, n.k.a. MARY L. ALPHIN,
                         Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 10839-99.              Filed February 17, 2004.



         Held: PH’s debts to lender were discharged
    pursuant to discharge order in ch. 7 bankruptcy case,
    notwithstanding failure of lender to file proofs of
    claim; lender’s foreclosure therefore gave rise to
    excludable discharge of indebtedness income, which
    reduced PH’s tax attributes pursuant to sec. 108(b),
    I.R.C., in amount of unsatisfied debt to lender
    remaining after foreclosure.



    H. Dee Johnson, Jr., pro se.

    Donna B. Read, for respondent.
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                         MEMORANDUM OPINION


     HALPERN, Judge:    Respondent has determined deficiencies in

petitioners’ Federal income taxes of $22,297 and $13,179 for 1994

and 1995, respectively (the audit years).     The parties have

settled or otherwise disposed of certain of the adjustments

resulting in those determinations, and the only question

remaining for decision is whether petitioner husband (petitioner)

has available for use by him in the audit years a claimed

$153,000 net operating loss (NOL) derived from his bankruptcy

estate.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the audit years, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     This case was submitted for decision without trial.     See

Rule 122.    The parties have agreed to stipulate certain facts

(the stipulation).    The stipulation, with attached exhibits, is

incorporated herein by this reference.   We shall not here

repeat the stipulation or recite the contents of the attached

exhibits.    We shall, however, summarize certain facts as an aid
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to understanding our report.    Petitioners bear the burden of

proof.   See Rule 142(a)(1).1

                             Background

     At the time the petition was filed, petitioners resided in

Dallas, Texas.

     On September 3, 1991, petitioner filed a voluntary petition

in bankruptcy (the bankruptcy petition) with the U.S. Bankruptcy

Court for the Eastern District of Texas (the bankruptcy court).

The bankruptcy petition was filed pursuant to chapter 7 of the

Bankruptcy Code (11 U.S.C.).    Upon the filing of the bankruptcy

petition, a taxable person separate from petitioner came into

existence; i.e., the bankruptcy estate (bankruptcy estate).      See

sec. 1398(a).    A trustee (the trustee) was appointed to represent

the bankruptcy estate.    Among the assets of the bankruptcy estate

were (1) a “$153,000 business debt” (the business debt), (2) real

property located in Argyle, Texas (the Argyle property), and (3)

real property located in Dallas, Texas (the Dallas property).

The business debt became worthless in 1991 after becoming an

asset of the estate.     Both the Argyle property and the Dallas

property (together, the properties) secured debts of petitioner


     1
        Sec. 7491, which, under certain circumstances, shifts the
burden of proof to the Commissioner, is inapplicable because the
examination in this case began before July 22, 1998, the
effective date of that section. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727.
                               - 4 -

to Citicorp Mortgage, Inc. (CMI).   Petitioner was delinquent on

those debts (the CMI debts) at the time petitioner filed the

bankruptcy petition, and CMI is listed as a secured creditor with

respect to the CMI debts in a schedule attached to that petition.

CMI did not file any proof of claim with respect to the CMI

debts.

     On October 31, 1991, CMI moved the bankruptcy court to lift

the stay prohibiting it from foreclosing petitioner’s interests

in the properties, and, on December 2, 1991, the court granted

the motion.   By order of the bankruptcy court dated December 18,

1991 (the discharge order), petitioner was released from all

dischargeable debts.

     Under the authority of the bankruptcy court’s December 2,

1991, order, CMI foreclosed petitioner’s interests in the

properties and caused the properties to be sold.   The Argyle

property was sold on March 3, 1992, leaving a deficiency (the

amount petitioner still owed) calculated as follows:

           Loan balance                $262,128
           Sale price                   171,500
             Deficiency                  90,628

The Dallas property was sold on April 7, 1992, leaving a

deficiency (the amount petitioner still owed) calculated as

follows:

           Loan balance                $128,572
           Sale price                    21,700
             Deficiency                 106,872
                                - 5 -

Neither the trustee nor petitioner satisfied the two

deficiencies, totaling $197,500 (the CMI deficiencies), in any

amount.

     On April 15, 1994, the trustee made a final report to the

bankruptcy court (trustee’s final report), reporting that the

total of the debts allowed was $52,590.14 and that the sum of

$47,673.98 was to be paid in respect of those claims, leaving the

sum of $4,916.16 unpaid.    The bankruptcy court accepted the

trustee’s final report.    The bankruptcy court issued a final

decree closing the bankruptcy case of petitioner on May 5, 1995.

     Neither the bankruptcy estate nor petitioner reported any

income from discharge of indebtedness on any Federal income tax

return.

     Petitioners made joint returns of income for the audit years

and, on those returns, claimed that petitioner had available for

use by him for those years a $153,000 NOL resulting from the

worthlessness of the business debt.     Following his audit of

petitioners’ returns for the audit years, respondent disallowed

the claimed NOL carryover.

                             Discussion

     Section 61(a)(12) includes as an item of gross income

“Income from discharge of indebtedness”.     Section 108(a)(1)(A)

provides that gross income does not include income from the

discharge of indebtedness if “the discharge occurs in a title 11
                               - 6 -

case”.   Section 108(d)(2) provides that the term “title 11 case”

means “a case under title 11 of the United States Code (relating

to bankruptcy), but only if the taxpayer is under the

jurisdiction of the court in such case and the discharge of

indebtedness is granted by the court or is pursuant to a plan

approved by the court.”   Section 108(b) provides that the amount

excluded from gross income under section 108(a)(1) must be

applied to reduce certain tax attributes of the taxpayer,

including any NOL of the taxpayer for the taxable year of the

discharge and any NOL carryover to that year.

     The parties are in agreement that the business debt became

worthless in the hands of the trustee, producing a deductible

loss of $153,000.   They are in disagreement as to the amount of

petitioner’s debt discharged by operation of the discharge order.

Petitioner appears to argue that, because the trustee’s final

report (accepted by the bankruptcy court) does not list the CMI

debts as claims against the bankruptcy estate, those debts were

not discharged.   Respondent disagrees.   On that point--whether,

by the discharge order, petitioner was discharged from the CMI

debts--we agree with respondent.   Petitioner misunderstands the

bankruptcy law.

     The CMI debts are not listed in the trustee’s final report

because CMI did not file proofs of claim with respect thereto.      A

proof of claim is the mechanism by which a creditor seeks
                                 - 7 -

recognition (or, in bankruptcy parlance, “allowance”) of his

claim for purposes of sharing in the distribution of estate

assets as part of the bankruptcy proceeding.   See 3 Cowans,

Bankruptcy Law and Practice, sec. 12.5(a), at 247 (7th ed. 1998).

There is no requirement that a creditor file a proof of claim;

that is, some creditors may seek recovery outside of the normal

estate distribution procedure.    See 11 U.S.C. sec. 501(a) (2000)

(creditor “may” file a proof of claim); see also In re Simmons,

765 F.2d 547, 551 (5th Cir. 1985) (a proof of claim should be

filed only when some purpose would be served thereby).    For

instance, a secured creditor can seek recovery by requesting

relief from the automatic stay in order to exercise his

foreclosure rights.   See 11 U.S.C. sec. 362(d) (2000).   A secured

creditor who is content to use foreclosure as his sole means of

recovery might opt not to bother with a proof of claim.    Such

apparently was the case here.

     By failing to file proofs of claim with respect to the CMI

debts, CMI waived its right to participate, vis-a-vis the CMI

deficiencies, in the distribution of estate assets as provided in

the trustee’s final report.   See 11 U.S.C. sec. 506(a) (2000) (an

allowed claim of a creditor secured by a lien is an unsecured

claim to the extent the value of the property is less than the

amount of such allowed claim); 11 U.S.C. sec. 726 (2000)

(distribution of property of the estate).   That is not to say,
                               - 8 -

however, that those amounts were not discharged.    To the

contrary, 11 U.S.C. section 727(b) (2000) provides that, with

exceptions not here relevant, the effect of a discharge by a

bankruptcy court is to discharge the debtor “from all debts that

arose before the date of the order for relief under this chapter

* * * whether or not a proof of claim based on any such debt * *

* is filed under section 501 of this title”.   Accordingly,

notwithstanding their omission from the trustee’s final report,

the CMI debts were discharged, giving rise to excludable

discharge of indebtedness income in the amount of the CMI

deficiencies ($197,500).   See sec. 108(a)(1)(A).

     Petitioners concede that, if respondent prevails (i.e., if

excludable income from discharge of indebtedness was realized on

account of petitioner’s discharge from the CMI debts), “$153,000

of * * * [the NOL] deduction [claimed on petitioners’ 1994 income

tax return] is eliminated under Section 108(b), and Petitioner’s

[sic] income tax return must be adjusted accordingly.”    As

contemplated by petitioners, respondent has prevailed.    We

therefore conclude that petitioners concede the correctness of

respondent’s adjustments eliminating from petitioners’ returns

for the audit years the claimed $153,000 NOL carryover resulting

from the worthlessness of the business debt.   We shall not

disturb respondent’s adjustment on account thereof.
                            - 9 -

To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.
