                  T.C. Summary Opinion 2003-90



                     UNITED STATES TAX COURT



               JAMES LEO ARMSTRONG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4834-00S.              Filed July 16, 2003.


     James Leo Armstrong, pro se.

     Monica J. Miller, for respondent.


     ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to

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

should not be cited as authority.



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1997,
the taxable year in issue, and all Rule References are to the Tax
Court Rules of Practice and Procedure.
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     Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 1997 in the amount of $1,377.

     The issue for decision is whether petitioner received income

from cancellation of indebtedness.     We hold that he did.

Background

     Some of the facts have been stipulated, and they are so

found.   Petitioner resided in Lantana, Florida, at the time that

his petition was filed with the Court.

     In or about 1991, petitioner began to incur debt on a credit

card issued to him by Mellon Bank.     Petitioner incurred the debt

in helping to finance a home improvement project for a woman with

whom he was romantically involved.     Subsequently, after the

relationship had soured, petitioner asked the woman for payment,

but she refused.   Petitioner continued to carry a balance on his

credit card account.

     In 1995, petitioner commenced an action against the woman in

the county court for Palm Beach County, Florida.     In the action,

petitioner sought to recover based on an alleged oral contract

between the woman and him.   In January 1996, judgment was entered

against petitioner on the ground that he was not a licensed

contractor and, therefore, was not entitled under Florida law to

recover on the alleged oral contract.     Petitioner did not appeal

the judgment, nor did he otherwise further pursue the matter

against the woman.   At no relevant time was the woman insolvent
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or bankrupt.

     By the beginning of 1997, the taxable year in issue,

petitioner was (and had been for some time) in arrears in the

payment of his credit card balance with Mellon Bank.   Later that

year, under circumstances not disclosed in the record, Mellon

Bank forgave petitioner the debt, some $5,513, owed on his credit

card account.

     Petitioner was not insolvent in 1997, nor did he file for

bankruptcy during that year.

     Mellon Bank issued to petitioner, and filed with respondent,

a Form 1099-C, Cancellation of Debt, reporting the cancellation

of indebtedness in 1997 in the amount of $5,513.   Petitioner did

not report any part of this amount on his Federal income tax

return for that year.

     Subsequently, respondent determined that petitioner failed

to report on his tax return for 1997 income from discharge of

indebtedness in the amount of $5,513.   Petitioner timely filed a

petition disputing respondent’s determination “due to the fact I

did not have an economic gain from the consideration.”

Petitioner also attached to the petition a statement alleging

that the home improvement project he helped finance was producing

rent that was not being reported by the woman he had assisted.

Petitioner concluded his statement with the following offer:
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     You have not nor will you ever see a tax dollar from
     this property without my information. Therefore, if
     you are willing [to] forgive my tax liability for 1997
     (I did not benefit from this debt) I will provide you
     with her name (only one like it) and the address of the
     rental property that you are not collecting tax dollars
     on (a lot of tax dollars). To acknowledge your
     acceptance of my request, please send me a form 201 (to
     pay a commission) and I will then send you her name and
     address.

Discussion

     A.   Applicable Principles

     Respondent’s determination in the notice of deficiency is

presumed correct, and petitioner must prove such determination

incorrect in order to prevail.2     Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).

     Section 61(a) provides that “gross income means all income

from whatever source derived” except as otherwise provided.     The

definition of gross income is broad in scope, Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955), and exclusions

from gross income are narrowly construed, United States v. Burke,

504 U.S. 229, 248 (1992); United States v. Centennial Sav. Bank

FSB, 499 U.S. 573, 583 (1991).

     It is beyond dispute that gross income includes income from

the discharge of indebtedness.     Sec. 61(a)(12); sec. 1.61-12(a),

Income Tax Regs.   As explained by the United States Supreme


     2
        Petitioner does not contend that sec. 7491(a) is
applicable to this case, nor is it.
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Court, the general theory is that to the extent that a taxpayer

has been released from indebtedness, the taxpayer has realized an

accession to income because the cancellation of indebtedness

effects a freeing of assets previously offset by the liability

arising from such indebtedness.     United States v. Kirby Lumber

Co., 284 U.S. 1 (1931); see Cozzi v. Commissioner, 88 T.C. 435,

445 (1987).   Thus, petitioner’s argument that he did not benefit

economically from the cancellation of his indebtedness to Mellon

Bank is simply not correct.

     A discharge of indebtedness generally produces income in an

amount equal to the difference between the amount due on the

obligation and the amount paid for the discharge.    If no

consideration is paid for the discharge, then the entire amount

of the debt is considered the amount of income that the debtor

must include in income.   Sec. 61(a)(12).   In the present case,

the amount owed by petitioner to Mellon Bank at the time of the

discharge was $5,513, and the amount paid by petitioner to Mellon

Bank for the discharge was $0.    Accordingly, the amount that

petitioner must include in income is $5,513, as determined by

respondent.

     Admittedly, there are both statutory and common law

exceptions to the rule requiring the recognition of income from

the discharge of indebtedness.    E.g., sec. 108(a), Zappo v.

Commissioner, 81 T.C. 77, 85-86 (1983).     Thus, for example, gross
                                - 6 -

income does not include any amount that would be includable in

gross income by reason of the discharge of indebtedness if the

discharge occurs in the context of a bankruptcy case or when the

taxpayer is insolvent.   However, none of these exceptions has

been shown to apply in the present case.

     Finally, we recognize that the debt incurred by petitioner

on his Mellon Bank credit card could be viewed as giving rise to

a series of loans, rather than gifts, from petitioner to the

woman, the nonpayment of which could give rise to a bad debt

deduction.   See sec. 166.   This view would require petitioner to

prove, inter alia, that: (1) A bona fide debt existed; (2) the

debt became worthless; and (3) worthlessness occurred during the

taxable year in issue.   See secs. 1.166-1(a), (c), and 1.166-2(a)

through (c), Income Tax Regs.

     Petitioner’s testimony at trial, if accepted at face value,

might suffice to prove that a bona fide debt existed.   However,

whether the debt became worthless is problematic.   In any event,

assuming that it did, the record would not support a finding that

the debt became worthless during the taxable year in issue.

Accordingly, we are unable to conclude that petitioner is

entitled to a bad debt deduction.

     B.   Conclusion

     For the reasons set forth above, respondent’s determination

is sustained.
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    Reviewed and adopted as the report of the Small Tax Case

Division.

    To give effect to our disposition of the disputed issue,



                                          Decision will be entered

                                     for respondent.
