                  T.C. Summary Opinion 2010-128



                      UNITED STATES TAX COURT



                DENNIS W. GAFFNEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13452-09S.            Filed August 30, 2010.




     Carol Vogt Lavine, for petitioner.

     Kimberly L. Clark, for respondent.



     HAINES, 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   Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended. Rule references are to the
Tax Court Rules of Practice and Procedure. Amounts are rounded
to the nearest dollar.
                                -2-

this opinion shall not be treated as precedent for any other

case.

     Respondent determined a deficiency in petitioner’s Federal

income tax for 2006 of $31,179 and a penalty under section

6662(a) of $6,236.   After concessions, the remaining issues for

decision are:   (1) Whether petitioner is required to include in

income $90,845 of cancellation of indebtedness income for taxable

year 2006 as reported by Bank of America; and (2) whether

petitioner is liable for the accuracy-related penalty under

section 6662(a).

                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.    At the time he filed his

petition, petitioner resided in Oregon.

Notice of Deficiency and Procedural Background

     Petitioner timely filed a joint income tax return for 2006.

Upon examination of petitioner’s return, respondent determined

that petitioner failed to include $90,845 of cancellation of

indebtedness income as reported for 2006 by Bank of America on

Form 1099-C, Cancellation of Debt, and issued a notice of

deficiency on March 9, 2009.   Respondent also determined a

penalty under section 6662(a) of $6,236.   On June 3, 2009,
                                -3-

petitioner filed a petition claiming that the cancellation of

indebtedness income reported on the Form 1099-C was erroneous.

Personal Background

     Petitioner was the president of Gaffney Enterprises, Inc.,

an Arizona S corporation that built homes in Hawaii during 1992

and part of 1993.   Because of a costly dispute with his company’s

insurer, petitioner and his wife sold most of their assets; and

in August of 1993 they abandoned their personal residence in

Hawaii and moved to an apartment in Carefree, Arizona.

     Unbeknownst to petitioner, on March 14, 1994, Bank of

America began proceedings against him in the Circuit Court of the

First Circuit of Hawaii to foreclose the mortgage on the

residence, and, during 1994, the residence was sold at public

sale.   On January 17, 1995, without petitioner’s knowledge, Bank

of America obtained a deficiency judgment against petitioner, who

was insolvent, and “charged off” loan No. 3759415 in the name of

Dennis Warren Gaffney for $90,845.    In August of 1995 petitioner

moved to Cave Creek, Arizona, where he lived until moving to his

current address in Oregon in March of 1998.   While in Arizona,

petitioner continued to receive mail forwarded from his personal

residence in Hawaii.   However, petitioner never received notice

of the foreclosure or the deficiency judgment, including service

of process or a copy of the complaint or judgment.
                                -4-

     After charging off loan No. 3759415 on January 17, 1995,

Bank of America intermittently engaged in collection activity on

the judgment.   However, Bank of America erroneously focused its

collection efforts in connection with loan No. 3759415 on Thomas

Gaffney.   Petitioner has no knowledge of Thomas Gaffney.   In Bank

of America’s records, Thomas Gaffney was attributed the same

Social Security number as petitioner and had the same address in

Cave Creek, Arizona, where petitioner previously resided.

According to the collection activity reports Bank of America

provided to respondent, collection activities against Thomas

Gaffney ceased on October 30, 2001.   After cessation of

collections, the only other activity that occurred with regard to

loan No. 3759415 was the creation of an asset profile report on

Thomas Gaffney on June 19, 2003.

     In 1996 petitioner settled his dispute with his company’s

insurer and negotiated a settlement that included payment of his

outstanding debts.   Petitioner neglected to include in the

settlement the judgment by Bank of America, of which he had no

knowledge.   Moreover, Bank of America failed to file a claim

against the litigation or settlement proceeds from the insurer,

despite the deficiency judgment obtained a year earlier.

     In 2006 Bank of America issued a Form 1099-C to Thomas

Gaffney which reported $90,845 in income from cancellation of

debt for the taxable year 2006 and referenced petitioner’s Social
                                  -5-

Security number.   Petitioner never received the Form 1099-C,

which was addressed to Thomas Gaffney at petitioner’s former

address in Cave Creek, Arizona.

     In 2008 petitioner was notified by the Internal Revenue

Service that he had failed to include $90,845 of cancellation of

indebtedness income Bank of America reported on a Form 1099-C for

the tax year 2006.     Petitioner contacted Bank of America to

determine why the Form 1099-C was issued.     In response, Joy

Brinley, an employee of Bank of America, sent petitioner a short

letter on November 4, 2008, simply stating, without further

evidence, that the account had been reviewed and the Form 1099-C

was correct.

                              Discussion

I.   Burden of Proof

     As a general rule, the Commissioner’s determinations as set

forth in a notice of deficiency are presumed correct, and the

taxpayer bears the burden of proving that those determinations

are erroneous.   Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933).   However, under certain circumstances the burden of proof

may shift to the Commissioner if the taxpayer introduces credible

evidence with respect to any factual issue relevant to

ascertaining the income tax liability of the taxpayer.     Sec.

7491(a)(1).
                                -6-

     If an information return, such as a Form 1099-C, serves as

the basis for the determination of a deficiency, section 6201(d)

may apply to shift the burden of production to the Commissioner.

Section 6201(d) provides that in any court proceeding, if a

taxpayer asserts a reasonable dispute with respect to the income

reported on an information return and the taxpayer has fully

cooperated with the Commissioner, then the Commissioner has the

burden of producing reasonable and probative information in

addition to the information return.   See McQuatters v.

Commissioner, T.C. Memo. 1998-88.

     Petitioner disputes the correctness of the information

return.   Petitioner claims that the amount of the discharge of

indebtedness income, if any, reported on the Form 1099-C for 2006

was incorrect and the debt should have been discharged by Bank of

America in some earlier year.

     Respondent does not dispute that the burden of production

has shifted to respondent under section 6201(d).   Indeed,

respondent acknowledges that petitioner disputed the information

return and cooperated with respondent.   Therefore, we hold that

section 6201(d) applies and that the burden is shifted to

respondent to produce reasonable and probative information
                                  -7-

concerning the deficiency in addition to the Form 1099-C Bank of

America filed.2

     In support of respondent’s assertion that the discharge of

indebtedness was for the correct amount and occurred in 2006,

respondent provided a letter from Bank of America, which stated

that the account had been reviewed and the Form 1099-C was

correct, along with a collection activity report.     The letter

likewise included the amount of the discharge, which petitioner

did not dispute in his petition and did not raise until the end

of the trial.     Thus, in the light of the evidence from Bank of

America respondent provided, we find that respondent produced

reasonable and probative information concerning the deficiency,

meeting his burden of production under section 6201(d).3




     2
      This is generally the rule in the Ninth Circuit, the Court
of Appeals to which this case would be appealable but for sec.
7463(b), under Weimerskirch v. Commissioner, 596 F.2d 358 (9th
Cir. 1979), revg. 67 T.C. 672 (1977), in unreported income cases.
See Lawson v. Commissioner, T.C. Memo. 2009-147 n.3; Rodriguez v.
Commissioner, T.C. Memo. 2009-92 n.2.
     3
      Whether the reasonable and probative standard of sec.
6201(d) is similar to that of Weimerskirch v. Commissioner, supra
at 362 (the Commissioner must establish a minimum evidentiary
foundation linking the taxpayer with the unreported income), or
of Portillo v. Commissioner 932 F.2d 1128 (5th Cir. 1991) (the
Commissioner may not rely solely upon naked assertions in an
information return that the taxpayer received income), affg. in
part, revg. in part and remanding T.C. Memo. 1990-68, respondent
has met it.
                                  -8-

II.   Year of the Discharge of Indebtedness

      In general, the term “income” as used in the Internal

Revenue Code means income from any source, including income for

the discharge of indebtedness.    Sec. 61(a)(12); Commissioner v.

Glenshaw Glass Co., 348 U.S. 426 (1955); United States v. Kirby

Lumber Co., 284 U.S. 1 (1931).    For 2006, Bank of America issued

to petitioner a Form 1099-C which reported discharge of

indebtedness income of $90,845.    According to respondent, that

amount is includable in petitioner’s 2006 income.

      The moment it becomes clear that a debt will never be

repaid, that debt must be viewed as having been discharged.

Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).     Any identifiable

event that fixes the loss with certainty may be taken into

consideration.   Id. (citing United States v. S.S. White Dental

Manufacturing Co., 274 U.S. 398 (1927)); cf. sec. 1.6050P-

1(b)(2)(i), (iv), Income Tax Regs. (providing an exclusive list

of eight “identifiable events” under which debt is discharged for

information reporting purposes, including a discharge pursuant to

a foreclosure, the application of a defined policy of the

creditor to discontinue collection activity and discharge the

debt, or the expiration of a nonpayment testing period (usually

36 months)).

      The determination of whether discharge of indebtedness has

occurred is fact specific and often turns on the subjective
                                 -9-

intent of the creditor as manifested by an objectively

identifiable event.    Cozzi v. Commissioner, supra at 445.     The

issuance of a Form 1099-C is an identifiable event, but it is not

dispositive of an intent to cancel indebtedness.    Owens v.

Commissioner, T.C. Memo. 2002-253, affd. in part, revd. in part

and remanded 67 Fed. Appx. 253 (5th Cir. 2003).    Moreover, a mere

bookkeeping entry by a creditor does not result in discharge of

indebtedness income.   See Cozzi v. Commissioner, supra at 445.

     Petitioner claims that the discharge of indebtedness income

reported on the Form 1099-C for 2006 should have been reported by

Bank of America in some earlier year.   Petitioner’s home was sold

in foreclosure in 1994, and Bank of America “charged off” loan

No. 3759415 in the name of Dennis Warren Gaffney on January 17,

1995.   However, Form 1099-C was not sent until 2006 and was

addressed to Thomas Gaffney at petitioner’s former address in

Cave Creek, Arizona, where he had not lived since 1998.    In

several cases before this Court in which a mortgage was

foreclosed upon, generating discharge of indebtedness income, the

Form 1099-C was issued in the same year as the foreclosure,

indicating that the foreclosure was the identifiable event

leading to the reporting of income from the discharge of

indebtedness.   See, e.g., Jelle v. Commissioner, 116 T.C. 63

(2001); Stoddard v. Commissioner, T.C. Memo. 2002-31; Johnson v.
                               -10-

Commissioner, T.C. Memo. 1999-162, affd. without published

opinion 211 F.3d 1265 (4th Cir. 2000).

     A decision by the creditor or the application of a defined

policy of the creditor to discontinue collection activity and

discharge the debt is an identifiable event that can force

reporting of cancellation of debt income.   Sec. 1.6050P-

1(b)(2)(i)(G), Income Tax Regs.   From the time of the foreclosure

in 1994 until October 30, 2001, Bank of America intermittently

engaged in collection activity on the judgment, as evidenced by

the collection activity reports Bank of America provided to

respondent.   However, the reports show no collection activities,

other than the printing of an asset profile report on Thomas

Gaffney during 2003, have occurred on the account since October

30, 2001.   In addition, there is a rebuttable presumption that an

identifiable event has occurred that triggers the reporting of

income from the discharge of indebtedness if a creditor has not

received a payment on a debt at any time during a testing period,

which is usually 36 months.   Sec. 1.6050P-1(b)(2)(i)(H), (iv),

Income Tax Regs.   Petitioner failed to make a payment on the debt

before the mortgage was foreclosed in 1994.   Thus, without

additional evidence of a Bank of America policy to the contrary,

it appears that the identifiable event in connection with the

discharge of indebtedness, if any, occurred well before 2006.
                                 -11-

         In support of respondent’s assertion that the discharge of

indebtedness occurred in 2006 and not when the loan was “charged

off” in 1995 or when collection activities ceased in 2001,

respondent provided a letter from Bank of America which stated

that the account had been reviewed and that both the Form 1099-C

and the amount of the discharge of indebtedness income were

correct.     Although sufficient to meet respondent’s burden of

production under section 6201(d), the evidence respondent

provided failed to indicate an identifiable event, a bank policy,

or a State law that would justify the discharge of indebtedness

in 2006.     We find that petitioner has satisfied his burden of

proving that the discharge occurred before 2006.     Therefore, we

hold that petitioner did not have $90,845 of income from the

discharge of indebtedness by Bank of America in 2006.4

III. Section 6662(a) Penalty

     Section 6662(a) and (b)(2) imposes a 20-percent accuracy-

related penalty upon any underpayment of tax resulting from a

substantial understatement of income tax.     An understatement is

substantial if it exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000.     Sec.

6662(d)(1)(A).     The Commissioner bears the burden of production

with respect to penalties.     Sec. 7491(c); Higbee v. Commissioner,


     4
      Petitioner further disputes the amount of the debt on the
Form 1099-C. However, because of our holding herein we find it
unnecessary to address his claim.
                                 -12-

116 T.C. 438, 446-447 (2001).    Because of our holding above,

respondent has failed to meet his burden of production with

respect to the penalty.   Accordingly, we hold that petitioner is

not liable for the accuracy-related penalty.

     The Court, in reaching its holding, has considered all

arguments made, and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                             Decision will be entered

                                        for petitioner.
