                              T.C. Memo. 2017-185



                         UNITED STATES TAX COURT



                THOMAS JOSEPH RITTER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1584-16.                           Filed September 19, 2017.



      Thomas Joseph Ritter, pro se.

      Richard L. Wooldridge, for respondent.



                           MEMORANDUM OPINION


      CHIECHI, Judge: Respondent determined a deficiency in, and an accuracy-

related penalty under section 6662(a)1 on, petitioner’s Federal income tax (tax) for

his taxable year 2013 of $7,250 and $1,450, respectively.


      1
       All section references are to the Internal Revenue Code (Code) in effect for
the year at issue. All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                          -2-

[*2] The issue remaining for decision for petitioner’s taxable year 2013 is

whether the $31,250 that he received in that year from a certain qualified settle-

ment fund is includible in gross income.2 We hold that it is.

                                      Background

        The facts in this case, which the parties submitted under Rule 122, have

been stipulated by the parties and are so found.

        Petitioner, Thomas Joseph Ritter, resided in Illinois at the time he filed the

petition.

        On December 7, 2009, JP Morgan Chase Bank (Chase Bank) filed a

complaint to foreclose mortgage with the Chancery Court of Bureau County,

Illinois (chancery court), in which it sought to foreclose with respect to the

mortgage loan on petitioner’s then principal residence. On January 20, 2010, that

court entered a judgment of foreclosure against petitioner and in favor of Chase

Bank.

        On March 8, 2010, petitioner filed a petition with the U.S. Bankruptcy

Court for the Central District of Illinois (bankruptcy court) under chapter 7 of title

11 of the U.S. Code (chapter 7). On March 17, 2010, Chase Bank filed a motion

        2
       Respondent concedes that petitioner is not liable for the accuracy-related
penalty under sec. 6662(a) that respondent determined in the notice of deficiency
(notice) issued to him for his taxable year 2013 (2013 notice).
                                         -3-

[*3] for relief from stay in that bankruptcy proceeding, which the bankruptcy court

granted on April 6, 2010.

      On July 2, 2010, the bankruptcy court granted petitioner a discharge under

chapter 7.

      On September 22, 2010, the chancery court issued an order in which it

approved the report of sale and distribution and confirmed the foreclosure sale of

petitioner’s then principal residence.

      On April 13, 2011, Chase Bank and the Office of the Comptroller of the

Currency (OCC) entered into a settlement agreement known as the Independent

Foreclosure Review (IFR). Pursuant to that agreement, Chase Bank agreed to take

certain actions in order to remedy certain “deficiencies and unsafe or unsound

practices in [Chase Bank’s] residential mortgage servicing and in the Bank’s

initiation and handling of foreclosure proceedings” that the OCC had identified.3

      3
        Separate from and independent of the IFR, the United States and 49 States
and the District of Columbia entered into consent agreements with various
mortgage loan servicers, including Chase Bank, known as the National Mortgage
Settlement (NMS), to settle allegations by those governments that those mortgage
loan servicers had violated various Federal and State laws (NMS settlement
agreements). Pursuant to the NMS settlement agreements, the mortgage loan
servicers were required to pay specified amounts to certain borrowers. Pursuant to
one component of those agreements, each borrower covered was to receive a
payment of $1,400 from a so-called borrower payment fund. As expressly set
forth in the NMS settlement agreements, the purposes of the “payments [pursuant
                                                                     (continued...)
                                        -4-

[*4] Petitioner was one of the borrowers harmed by those practices.

        On February 28, 2013, Chase Bank and the OCC entered into an agreement

to amend the IFR (February 28, 2013 amendment) by superseding article VII,

titled “FORECLOSURE REVIEW”, of the IFR “in the interest of providing the

greatest benefit to borrowers potentially affected by the practices at the Bank

addressed in the * * * [IFR] in a more timely manner than would have occurred”.

Pursuant to the February 28, 2013 amendment to which Chase Bank and the OCC

agreed, Chase Bank agreed to establish a qualified settlement fund (QSF) within

the meaning of section 1.468B-1, Income Tax Regs., with certain other lenders

that had also entered into certain other agreements with the OCC from which

payments were to be made to those borrowers who had been harmed by Chase

Bank’s (as well as certain other lenders’) banking practices and who had pending

or completed foreclosures with respect to their primary residences during the

period January 1, 2009, through December 31, 2010. Petitioner was one of the

borrowers who received a payment from the QSF, which is the payment at issue

here.

        3
       (...continued)
to the NMS] * * * are remedial and relate to the reduction in the proceeds deemed
realized by borrowers for tax purposes from the foreclosure sale of residential
properties owned by the borrowers allegedly resulting from the allegedly unlawful
conduct of” the mortgage loan servicers.
                                        -5-

[*5] Pursuant to the IFR and the February 28, 2013 amendment, a borrower was

not required to show financial harm or request a review through the IFR in order

to receive a payment. The February 28, 2013 amendment expressly provided that

the payments from the QSF did not “in any manner reflect specific financial injury

or harm that may have been suffered by borrowers receiving payments”. More-

over, the categories for the so-called standard payment amounts set forth in a

document titled “Independent Foreclosure Review Payment Agreement Details”

did not include any amounts for lost equity.

      A plan to distribute funds from the QSF (distribution plan) was prepared

which established different categories of borrowers that were based upon different

loan file characteristics and whether the borrower had requested a review through

the IFR. The OCC and the Board of Governors of the Federal Reserve System

(Federal Reserve Board) determined in their sole discretion a specific payment

amount, a so-called standard payout amount, for each category of borrowers.

Pursuant to the distribution plan, petitioner was categorized as a borrower who did

not request review through the IFR and whose mortgage loan servicer (i.e., Chase

Bank) initiated or completed foreclosure with respect to the mortgage loan on

petitioner’s then principal residence while he was protected by Federal bankruptcy

law. (For convenience, we shall refer to the category of borrowers into which
                                       -6-

[*6] petitioner was placed who did not request review through the IFR and whose

mortgage loan servicer (i.e., Chase Bank) initiated or completed foreclosure while

the borrower was protected by Federal bankruptcy law as petitioner’s category of

borrowers.) Petitioner’s category of borrowers was not eligible for a payment

representing lost equity. Like all borrowers so categorized, the OCC and the

Federal Reserve Board had determined that the standard payout amount payable to

petitioner’s category of borrowers was $31,250.

      On November 8, 2013, pursuant to the IFR and the February 28, 2013

amendment, the QSF issued to petitioner a check for $31,250, which he cashed.

(We shall sometimes refer to the $31,250 that the QSF paid to petitioner as the

$31,250 payment.)

      The QSF issued to petitioner, and sent to respondent a copy of, Form 1099-

MISC, Miscellaneous Income (petitioner’s Form 1099), for his taxable year 2013.

That form, which was accompanied by a letter to petitioner, showed that petitioner

has “Other income” of $31,250 for that year and that no tax was withheld from

that income. The letter that accompanied petitioner’s Form 1099 gave the follow-

ing explanation why the QSF had issued that form:

            In the 2013 tax year, you received a payment as a result of an
      agreement between federal banking regulators and your mortgage
      servicer in connection with an enforcement action related to deficient
                                           -7-

[*7] mortgage servicing and foreclosure processes. Your payment in-
     cluded a letter explaining the breakdown of your payment and other
     important information and disclosures. * * * Please visit
     www.independentforeclosurereview.com for tax information * * *.

      *             *           *          *           *          *           *

            Below is your IRS Form 1099-MISC, which you will need
      when you file your tax return for the period January 1, 2013 through
      December 31, 2013. * * * If you have questions about the taxability
      of your payment, you should contact a tax advisor.

      Petitioner timely filed Form 1040, U.S. Individual Income tax Return, for

his taxable year 2013. In that return, petitioner did not include in gross income the

$31,250 that he received from the QSF pursuant to the IFR and the February 28,

2013 amendment.

      In the 2013 notice that respondent issued to petitioner, respondent deter-

mined, inter alia, that the $31,250 payment is includible in gross income.

                                       Discussion

      Petitioner bears the burden of proving that the determination in the 2013

notice that remains at issue, i.e., the $31,250 payment is includible in gross income

for petitioner’s taxable year 2013, is erroneous.4 See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).




      4
          We allowed the parties to file briefs. Petitioner chose not to do so.
                                        -8-

[*8] Section 61(a) defines the term “gross income” in general to mean “all

income from whatever source derived”. It is axiomatic that a taxpayer’s acces-

sions to wealth are presumed to be includible in gross income. See, e.g., Commis-

sioner v. Glenshaw Glass Co., 348 U.S. 426, 430-431 (1955). Accessions to

wealth may be excluded from gross income only if the taxpayer establishes that

the Code specifically provides such an exclusion. See id.

      In determining the tax treatment of a payment to settle a claim, we must ask

“[i]n lieu of what were the damages awarded”? Raytheon Prod. Corp. v. Commis-

sioner, 144 F.2d 110, 113 (1st Cir. 1944), aff’g 1 T.C. 952 (1943).

      Section 468B and the regulations thereunder provide special rules for the

taxation of a designated settlement fund, like the QSF. Pursuant to section

1.468B-4, Income Tax Regs., whether a distribution from a designated settlement

fund, like the QSF, is includible in a payee’s gross income is generally determined

by reference to the claim in respect of which the distribution is made and as if the

distribution were made directly to the payee by the transferor to the designated

settlement fund.

      The $31,250 payment that petitioner received from the QSF was a payment

to remedy certain “deficiencies and unsafe or unsound practices in [Chase Bank’s]

residential mortgage servicing and in the Bank’s initiation and handling of
                                        -9-

[*9] foreclosure proceedings” that the OCC had identified. Pursuant to the IFR

and the February 28, 2013 amendment, a borrower was not required to show

financial harm or request a review through the IFR in order to receive a monetary

payment. The February 28, 2013 amendment expressly provided that the pay-

ments from the QSF did not “in any manner reflect specific financial injury or

harm that may have been suffered by borrowers receiving payments”. Moreover,

the categories for the so-called standard payment amounts set forth in a document

titled “Independent Foreclosure Review Payment Agreement Details” did not

include any amounts for lost equity.

      The distribution plan for distributions from the QSF established different

categories of borrowers that were based upon different loan file characteristics and

whether the borrower requested a review through the IFR. The OCC and the

Federal Reserve Board determined in their sole discretion a specific payment

amount, a so-called standard payout amount, for each category of borrowers.

Pursuant to the distribution plan, petitioner was categorized as a borrower who did

not request review through the IFR and whose mortgage loan servicer (i.e., Chase

Bank) initiated or completed foreclosure with respect to the mortgage loan on

petitioner’s then principal residence while he was protected by Federal bankruptcy

law. Petitioner’s category of borrowers was not eligible for a payment represent-
                                        - 10 -

[*10] ing lost equity. Like all borrowers so categorized, the OCC and the Federal

Reserve Board had determined that the standard payout amount payable to

petitioner’s category of borrowers was $31,250.

      The fully stipulated record is devoid of evidence establishing that the

$31,250 payment was, or was intended to be, a deemed increase or decrease in the

amount realized by petitioner from the foreclosure with respect to the mortgage

loan on his then principal residence.5 Nor does that record contain any evidence

establishing that petitioner is entitled under a specific Code section to exclude that

payment from gross income.




      5
       Although petitioner does not rely on Rev. Rul. 2014-2, 2014-2 I.R.B. 255,
we address it briefly. That ruling considered the tax treatment of payments made
pursuant to the NMS, which was totally separate from and independent of the IFR.
See supra note 3. In Rev. Rul. 2014-2, supra, the Internal Revenue Service (IRS)
answered the question “[i]n lieu of what were the damages [payments pursuant to
the NMS] awarded”, Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110, 113
(1st Cir. 1944), aff’g 1 T.C. 952 (1943), as follows: “Here, as reflected in the
[NMS] settlement documents, the NMS Payment from the Fund is an additional
amount realized on the foreclosure of the borrower’s principal residence. That
amount realized is used to determine any gain or loss realized under * * * [section]
1001, including gain that may be excluded under * * * [section] 121.” The
payments pursuant to the NMS that the IRS analyzed in Rev. Rul. 2014-2, supra,
are materially distinguishable from the payments pursuant to the IFR and the
February 28, 2013 amendment, such as the $31,250 payment that petitioner
received. Consequently, Rev. Rul. 2014-2, supra, does not control the tax
treatment of that payment.
                                        - 11 -

[*11] On the record before us, we find that petitioner is required to include in

gross income for his taxable year 2013 the $31,250 payment that he received.

        We have considered all of the contentions and arguments of the parties that

are not discussed herein, and we find them to be without merit, irrelevant, and/or

moot.

        To reflect the foregoing and the concession of respondent,


                                                 Decision as to the deficiency will be

                                       entered for respondent and as to the accu-

                                       racy-related penalty under section 6662(a)

                                       will be entered for petitioner.
