                  T.C. Summary Opinion 2006-188



                     UNITED STATES TAX COURT



   STEPHEN BERNARD SCHACHNER, JR., AND JILL FRANCES SCHACHNER,
                          Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23478-05S.                Filed December 13, 2006.


     Stephen Bernard Schachner, Jr., and Jill Frances Schachner,

pro sese.

     Edwina Jones, for respondent.



     ARMEN, Special Trial 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    The decision to be entered




     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2003,
the taxable year in issue.
                                 - 2 -

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

be cited as authority.

     Respondent determined a deficiency in petitioners’ Federal

income tax for 2003 in the amount of $1,950.

     The sole issue for decision is whether petitioners should

have included $7,807 of cancellation of indebtedness income on

their 2003 Federal income tax return.    We hold that they should

have done so and therefore sustain respondent’s determination.

                            Background

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

found.   We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

     At the time the petition was filed, Stephen Bernard

Schachner (Mr. Schachner) and Jill Frances Schachner (jointly

petitioners) lived in Charlotte, North Carolina.

     In 1994, while Mr. Schachner was taking classes at a local

community college, he borrowed $10,030 from University Support

Services to purchase an Apple computer (the Apple loan).   At Mr.

Schachner’s request, his mother-in-law applied for the loan on

his behalf, and both Mr. Schachner and his mother-in-law signed

the Application & Promissory Note, agreeing to be jointly and

severally liable for the loan.

     In 1995, petitioners filed a Chapter 13 bankruptcy petition

with the United States Bankruptcy Court for the Western District
                               - 3 -

of North Carolina.   A discharge was granted on April 7, 2000.

The Apple loan was not discharged as a part of the bankruptcy

proceedings.2

     In 2003, approximately $7,807 of the Apple loan debt

remained unpaid, and the debt was canceled by EduCap, Inc.

(EduCap), the successor to University Support Services and then-

current holder of the loan.   EduCap mailed Mr. Schachner a Form

1099-C, Cancellation of Debt, reporting the $7,807 discharge of

indebtedness.3   At trial, Mr. Schachner testified that he did not

receive it.

     Respondent’s determination of a deficiency in petitioners’

Federal income tax for the taxable year 2003 was solely

attributable to petitioners’ failure to report the cancellation

of indebtedness income.




     2
        The Application & Promissory Note makes it clear that the
Apple loan is not dischargeable in bankruptcy during the first 7
years of repayment. Additionally, the Apple loan was found to be
nondischargeable pursuant to a Stipulated Order Determining
Character and Treatment of Claim of University Support Services
entered as a part of the ch. 13 bankruptcy proceedings.
     3
        Despite the fact that the Application & Promissory Note
made Mr. Schachner and his mother-in-law jointly and severally
liable for the Apple loan, neither University Support Services
nor its successor, EduCap, Inc., appears to have regarded Mr.
Schachner’s mother-in-law as a debtor or looked to her for
repayment of the loan. This approach is consistent with the
issuance of the Form 1099-C to Mr. Schachner in the full amount
of the discharged debt.
                                 - 4 -

                             Discussion4

     Section 61 generally defines gross income as “all income

from whatever source derived”.    Section 61(a)(12) specifically

provides that gross income includes income from the discharge of

indebtedness.   See also Gitlitz v. Commissioner, 531 U.S. 206,

213 (2001); United States v. Kirby Lumber Co., 284 U.S. 1 (1931).

Section 108(a)(1) lists several exclusions from this general

rule, and petitioners argue that the exclusion in section

108(a)(1)(A) applies because the “loan was discharged in [their]

Chapter 13 bankruptcy 4 years ago.”

     Section 108(a)(1)(A) provides that gross income does not

include cancellation of indebtedness income if the discharge

occurs in a title 11 case.   Title 11 of the United States Code

contains the provisions relating to bankruptcy, including the

rules related to 11 U.S.C. Chapter 13, Adjustment of Debts of an

Individual with Regular Income.    Yet the Apple loan was

specifically not discharged--nor was it dischargeable--in the

bankruptcy proceedings.   The loan remained on EduCap’s books

until it was written off on April 30, 2003.    Section 108(a)(1)(A)

does not apply.5


     4
        The issue for decision is essentially legal in nature;
accordingly, we decide it without regard to the burden of proof.
     5
        The other exclusions listed in sec. 108(a)(1) are
inapplicable as well: Petitioners were not insolvent at the time
the debt was discharged, the debt was not qualified farm
                                                   (continued...)
                                - 5 -

     Petitioners also claim that they “are not the guarantor of

the loan.”    At trial, Mr. Schachner attempted to argue that since

he was not the “applicant”, the debt was not his.   However, the

simple fact remains that Mr. Schachner signed the Application &

Promissory Note, promising to be held jointly and severally

liable for the debt.   He received the proceeds of the loan

directly.    Further, the sole purpose in obtaining the loan was to

enable him to purchase a computer and further his education.6

Mr. Schachner’s attempt to avoid responsibility and place the

debt and its consequences solely with his mother-in-law is

unavailing.

     To the extent petitioners have made other arguments, the

Court concludes such arguments are without merit.

     As no exclusion applies and the debt was clearly Mr.

Schachner’s responsibility, petitioners should have included

$7,807 of cancellation of indebtedness income in their gross

income on their 2003 tax return.




     5
      (...continued)
indebtedness, and the debt was not qualified real property
business indebtedness. See sec. 108(a)(1)(B), (C), and (D).
     6
        The Court finds it worth noting that, although he never
finished his degree, Mr. Schachner has been employed with
Microsoft Corp. since 1999 and earns a substantial salary, no
doubt due in part to this education.
                             - 6 -

                          Conclusion

    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect our disposition of the disputed issue,



                                       Decision will be entered

                                  for respondent.
