                        T.C. Memo. 2009-239



                     UNITED STATES TAX COURT



          WM. JON & MARY LOU MCCORMICK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14362-08.             Filed October 21, 2009.



     Wm. Jon McCormick and Mary Lou McCormick, pro sese.

     Julia L. Wahl, for respondent.



                        MEMORANDUM OPINION


     COHEN, Judge:   Respondent determined a deficiency of $5,067

in petitioners’ Federal income tax for 2005 and an accuracy-

related penalty of $1,007 pursuant to section 6662(a).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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     After express concessions and abandoned issues, the issue

for decision is whether petitioners must recognize discharge of

indebtedness income as a result of settlement of their accounts

with CitiFinancial Services and Chase Manhattan Bank.

                             Background

     This case was submitted fully stipulated under Rule 122, and

the stipulated facts are incorporated as our findings by this

reference.    Petitioners resided in Pennsylvania at the time the

petition was filed.    William Jon McCormick (petitioner) is an

attorney.

     From at least 2004 petitioners maintained a loan account

with CitiFinancial Services (CitiFinancial).    Prior to February

1, 2005, petitioners were advised that the “payoff” amount of the

loan was $8,042.10.    In a fax sent February 1, 2005, to a branch

manager, petitioner challenged the payoff amount, claiming that

an insurance refund of $492.44 should have been credited to the

account.    The following day, the manager offered to settle the

dispute for a lump-sum payment of $7,500.    Petitioner accepted

and paid the $7,500.    CitiFinancial sent a Form 1099-C,

Cancellation of Debt, to the Internal Revenue Service.

     Before December 2000, petitioner Mary Lou McCormick,

formerly Mary Lou Howard, had a credit card with Chase Manhattan

Bank (Chase).    The account was placed with collection agencies

January 4, 2001, and October 10, 2001.    Petitioners disputed the
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account from at least February 2002.     On May 12, 2005, petitioner

sent a letter to Chase challenging the alleged account balance of

$2,875 and noting that the period of limitations on a suit to

collect had expired.   Petitioner offered to pay $1,000 as the

amount “actually owed”.   Chase accepted and mailed petitioner

Mary Lou McCormick a 2005 Form 1099-C for $1,875, the difference

between the balance on the account and the payment.

                            Discussion

     The issue remaining for decision is whether petitioners had

cancellation of indebtedness income from CitiFinancial and Chase.

     Section 61(a)(12) includes in the general definition of

gross income “income from discharge of indebtedness”.    When the

amount of a debt is disputed, “a subsequent settlement of the

dispute would be treated as the amount of debt cognizable for tax

purposes.”   Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir.

1990) (holding that unenforceable debt is also disputed as to

amount, and its settlement does not give rise to cancellation of

indebtedness income) revg. 92 T.C. 1084 (1989); N. Sobel, Inc. v.

Commissioner, 40 B.T.A. 1263, 1265 (1939).     There must be

evidence of a dispute; a settlement standing alone does not prove

that a good-faith dispute existed.     See Rood v. Commissioner,

T.C. Memo. 1996-248, affd. without published opinion 122 F.3d

1078 (11th Cir. 1997).
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     In a fax sent to CitiFinancial petitioner argued that the

loan payoff amount of $8,042.10 should be reduced by a $492.44

insurance refund.   Aside from the insurance refund, petitioners

do not argue that the payoff amount was incorrect.

     In a letter sent to Chase petitioner argued that the

outstanding balance should be $1,000 rather than the $2,875

claimed by the bank.   Bank records reflected that the account had

been disputed from at least 2002.

     The preponderance of the evidence supports a conclusion that

a bona fide dispute existed regarding the $492.44 insurance

refund on the CitiFinancial debt and the balance of the Chase

account over $1,000.   See, e.g., Earnshaw v. Commissioner, T.C.

Memo. 2002-191, affd. 150 Fed. Appx. 745 (10th Cir. 2005); see

also Melvin v. Commissioner, T.C. Memo. 2009-199.

     To determine the amount of cancellation of indebtedness

income properly attributed to petitioners, we must determine the

amount of the CitiFinancial and Chase debt that was definite and

liquidated.   See Zarin v. Commissioner, supra at 116.

     In this case, respondent may not rely on the Forms 1099-C

submitted by CitiFinancial and Chase as evidence of the amount of

debt that was definite and liquidated.   Section 6201(d) provides

that in any court proceeding, if a taxpayer asserts a reasonable

dispute with respect to any item of income reported on an

information return and has fully cooperated, the Commissioner
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shall have the burden of producing reasonable and probative

information concerning the deficiency in addition to the

information return.    Petitioners have asserted reasonable

disputes with respect to the amounts reported by CitiFinancial

and Chase.    Respondent has failed to produce reasonable and

probative information independent of the third-party information

returns.

     Petitioners did not dispute the CitiFinancial claimed payoff

amount of $8,042.10, less the disputed insurance refund of

$492.44, a total of $7,549.66.    That amount is decreased by the

settlement payment of $7,500.    We conclude that the amount of

petitioners’ cancellation of indebtedness income from

CitiFinancial is $49.66.

     Petitioners had an uncontested and liquidated outstanding

balance of $1,000 with Chase.    Because they paid $1,000 to settle

the account, they have no cancellation of indebtedness income

from Chase.

     In reaching our decision, we have considered all arguments

made by the parties.    To the extent not mentioned or addressed,

they are irrelevant or without merit.

     For the reasons explained above,


                                         Decision will be entered

                                   under Rule 155.
