                  T.C. Summary Opinion 2005-117



                     UNITED STATES TAX COURT



    JUDITH M. DE SHON AND MICHAEL J. DE SHON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5866-04S.              Filed August 8, 2005.


     Michael J. De Shon, pro se.

     Sean R. Gannon, 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




     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 2001,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
                               - 2 -

be entered 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 the taxable year 2001 of $5,101 and an accuracy-

related penalty under section 6662(a) of $1,020.

      After dismissal of petitioner Judith M. De Shon2 and after

concessions,3 the issues for decision are:

(1)   Whether petitioners received unreported discharge of

indebtedness income of $12,253 in taxable year 2001.     We hold

that they did to the extent provided herein.

(2)   Whether petitioners are liable under section 6662(a) for an

accuracy-related penalty.   We hold that they are not.




      2
        Petitioner Judith M. De Shon (Mrs. De Shon) did not
appear at trial and did not execute the stipulation of facts.
Petitioner Michael J. De Shon (Mr. De Shon) is not admitted to
practice before this Court and is therefore not authorized to
represent Mrs. De Shon in this Court notwithstanding a purported
durable power of attorney. See Rules 24, 200. Accordingly, the
Court will dismiss this action as to Mrs. De Shon. Rule 123(b).
Decision, however, will be entered against Mrs. De Shon
consistent with the decision entered against Mr. De Shon as to
the deficiency and the accuracy-related penalty.
      3
        Respondent concedes that petitioners did not receive
Social Security benefits of $246. Petitioners concede that they
received: (1) Social Security benefits of $6, (2) interest
income of $58 from Catholic Aid Association (Catholic Aid), (3) a
taxable distribution of $6,611 from Catholic Knights Insurance
Society, and (4) a taxable distribution of $3,001 from Catholic
Aid.
                                - 3 -

                              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 that the petition was filed, petitioners resided

in Mount Prospect, Illinois.    References to petitioners

individually are to Mr. De Shon or Mrs. De Shon.

     From as early as 1986 through May 1999, petitioners had a

joint Discover credit card account ending with the numbers 790

(account 790).    The credit card statement for this account as of

July 26, 1998, indicated that petitioners made a payment of $130

and purchases of $192 and incurred finance charges of $128.       The

account balance was $7,427.    In September 1998, Mr. De Shon filed

by telephone with Discover a dispute concerning the balance due

as reflected in the July 26, 1998 statement.     Mr. De Shon did not

dispute the purchases made but rather disputed the amount of the

balance due.

     The credit card statement as of August 26, 1998, indicated

that petitioners made a purchase of $46 and incurred a late fee

of $25 and finance charges of $134.     The account balance was

$7,631.    The statement contained language indicating that the

account was past due and demanded payment of such amount.     In

October 1998, Mr. De Shon filed by telephone with Discover a

dispute concerning the balance due as reflected in the August 26,
                                - 4 -

1998 statement.    Mr. De Shon again disputed the amount of the

balance due.

     The credit card statement as of September 26, 1998,

indicated that petitioners incurred a late fee of $25, an

overlimit fee of $25, and finance charges of $147.     The account

balance was $7,828.    The statement contained language indicating

that the account was past due and demanded payment of such

amount.

     The credit card statement as of October 26, 1998, indicated

that petitioners incurred a late fee of $25, an overlimit fee of

$25, and finance charges of $146.    The account balance was

$8,024.   The statement contained language indicating that the

account was past due and demanded payment of such amount.

     In November 1998, Mr. De Shon submitted to Discover a

written dispute.    In response to Mr. De Shon’s inquiry,

petitioners received from Discover a collection letter dated

December 12, 1998, concerning the delinquency of $8,229 in

account 790.   The letter stated in part as follows:

     As you know, your account is now four months past due.

     We feel that we have been patient in handling your
     account, but you have not cooperated with us to take
     care of this serious matter. To protect Discover
     Card’s interest, we must now take action.

     We expect you to send a substantial payment immediately
     along with your plan for future monthly payments to
     clear this delinquency. Please contact us today so
     that we may discuss this matter.
                               - 5 -

     If we do not hear from you, your account will be
     reviewed by our department manager. Your actions
     determine our handling of this account.

     In response, Mr. De Shon faxed to Discover a letter again

disputing the amount due.   Mr. De Shon did not receive any

communication or correspondence from Discover in response to his

dispute, nor did he receive a replacement Discover card when his

card expired in May 1999.   Petitioners received their last

statement pertaining to account 790 in May or June 1999.

Petitioners did not remit any payments to this account after July

21, 1998.

     Petitioners maintained another joint Discover credit card

account ending with the numbers 879 (account 879).   The address

listed for this account was the same address that was listed for

account 790, which is also petitioners’ current mailing address.

The credit card statement as of July 13, 2000, indicated a

previous balance of $2,462, a purchase identified as “Bravo

Reserve previous balance” of $1,155, and a new balance of

$3,617.4

     In early 2002, petitioners received from Discover two Forms

1099-C, Cancellation of Debt, for 2001:   one each for accounts


     4
        Respondent introduced at trial a photocopy of this
statement and the declaration in lieu of affidavit to which Mr.
De Shon objected on the basis of lack of authenticity and
completeness. The Court admitted the evidence on the condition
that respondent furnish the original documents to the Court.
Subsequent to trial, respondent submitted to the Court the
original documents. Mr. De Shon’s objection is overruled.
                                 - 6 -

790 and 879.     Discover addressed both Forms 1099-C to Mrs. De

Shon at her current mailing address.       In the Forms 1099-C,

Discover reported that it had canceled the debt due on accounts

790 and 089 of $8,637 and $3,616, respectively, on December 31,

2001.     Petitioners did not contact Discover with respect to

either of the Forms 1099-C.

     On their Federal income tax return for 2001, petitioners did

not report the amounts reported on the Forms 1099-C.

     Respondent determined that petitioners failed to report on

their tax return for 2001 income from the cancellation of

indebtedness of $12,253.     Respondent further determined that

petitioners are liable for the accuracy-related penalty for

substantial understatement of income tax.

                              Discussion

A.   Discharge of Indebtedness

     1.      Applicable Principles

     Generally, the Commissioner’s determinations 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, 115 (1933).     Under section 7491(a)(1), however, the

burden of proof shifts to the Commissioner if, inter alia, the

taxpayer first introduces credible evidence with respect to any

factual issue relevant to ascertaining the taxpayer’s liability
                                 - 7 -

for income tax.     Higbee v. Commissioner, 116 T.C. 438, 442

(2001).

     Gross income includes all income from whatever source

derived, including but not limited to discharge of indebtedness.

Sec. 61(a)(12); sec. 1.61-12(a), Income Tax Regs.       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.    See Babin v. Commissioner, 23

F.3d 1032, 1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.          As

explained by the United States Supreme 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, 3

(1931); see Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).

     Debt is deemed discharged the moment it becomes clear that

the debt will never have to be paid.        Cozzi v. Commissioner,

supra at 445.   The test for determining when this moment occurs

requires an assessment of the facts and circumstances surrounding

the likelihood of repayment.     Id.     “Any ‘identifiable event’

which fixes the loss with certainty may be taken into

consideration.”     Id. (quoting United States v. S.S. White Dental

Manufacturing Co., 274 U.S. 398, 401 (1927)).
                                 - 8 -

          2.   Account 790

     Mr. De Shon contends that they did not receive a discharge

of indebtedness because they were not liable for the amount

allegedly discharged.   In the alternative, Mr. De Shon contends

that the discharge of indebtedness did not occur in 2001.

Respondent, on the other hand, contends that petitioners received

discharge of indebtedness income as reported on the Form 1099-C.

We need not address Mr. De Shon’s first contention because we

decide this issue on the basis of Mr. De Shon’s alternative

contention.

     Having observed Mr. De Shon’s appearance and demeanor at

trial, we find his testimony to be honest, sincere, and credible.

On the basis of the entirety of the record, we do not find that

issuance of the Form 1099-C was the identifiable event

establishing when Discover discharged petitioners’ debt.    In

light of the facts and circumstances in the instant case, we find

that Discover’s cessation of debt collection activity in 1999 was

the identifiable event fixing the loss with certainty.   See Cozzi

v. Commissioner, supra at 445.

     Petitioners filed their first dispute with Discover in

September 1998 and again in October and November 1998.   The only

response petitioners received was a collection letter dated

December 12, 1998.   The collection letter indicated that

Discover’s department manager would determine the handling of
                               - 9 -

petitioners’ account if they failed to contact Discover.

Petitioners made no further attempts to contact Discover.

     Although Discover continued to send petitioners monthly

statements through May or June 1999, which presumably contained

language stating that petitioners’ account was past due and

demanded payment, Discover did not contact petitioners concerning

their dispute.   Moreover, petitioners did not receive any

additional collection letters after December 1998, and Discover

did not issue a new card when Mr. De Shon’s card expired in May

1999.   The evidence in the record demonstrates that because

petitioners received no further communication from Discover after

mid-1999, it is reasonable to assume that petitioners’ account

was written off as a practical matter at that time.    Taking into

account all the facts and circumstances, the fact that Discover

may not have removed petitioners’ debt from their books until

2001 because of a faint possibility of collecting the debt does

not establish that the discharge occurred in 2001.    See Exch.

Sec. Bank v. United States, 492 F.2d 1096, 1099 (5th Cir. 1974)

(settlement agreement fixed the time when cancellation of debt

occurred, not when the debt was removed from the company’s

books); Bear Manufacturing Co. v. United States, 430 F.2d 152,

154 (7th Cir. 1970) (as a practical matter, income is realized

when the liability terminates); Fidelity-Philadelphia Trust Co.

v. Commissioner, 23 T.C. 527, 530 (1954) (“The important
                                - 10 -

consideration is that it was unlikely as a matter of fact that

the bank would have to honor its obligation to the depositors.”);

Rivera v. Commissioner, T.C. Memo. 1993-609 (a settlement

agreement, a court order, and payment pursuant to the settlement

agreement together reasonably established an abandonment of debt,

not when payments recorded); Estate of Marcus v. Commissioner,

T.C. Memo. 1975-9 (decedent’s estate realized income in the year

of decedent’s death because the executors did not intend to

satisfy certain debts and the creditor did not intend to enforce

such claims).   A deemed discharge of indebtedness occurred in

1999 when Discover ceased collection activities against

petitioners.    Accordingly, we conclude that petitioners did not

receive discharge of indebtedness income from account 790 of

$8,637 in 2001.

          3.      Account 879

     Mr. De Shon denies ownership of account 879.   In contrast,

respondent contends that petitioners received discharge of

indebtedness income as reported on the Form 1099-C.   We agree

with respondent.

     Petitioners in fact received the Form 1099-C from Discover,

which was addressed to their current mailing address.   Upon

receiving the Form 1099-C, we find it noteworthy that petitioners

did not contact Discover concerning this account, especially in

light of their contention that they did not maintain this
                                - 11 -

account.   Moreover, the mailing address on the August 2000

monthly statement was the same as petitioners’ current mailing

address.

     On the one hand, Mr. De Shon testified at trial that he had

no knowledge of this account, but, on the other hand, he

testified that he had no knowledge of a lot of paperwork in Mrs.

De Shon’s possession.   Mr. De Shon’s conflicting testimony leads

to an inference that petitioners, either jointly or separately,

in fact maintained account 879.

     On the basis of the record, we conclude that petitioners

received discharge of indebtedness income from account 879 of

$3,617 in 2001.   Accordingly, we sustain respondent’s

determination on this issue.

B.   Section 6662(a) Penalty

     In the notice of deficiency, respondent determined that

petitioners are liable under section 6662(a) for an underpayment

of tax that is attributable to substantial understatement of

income tax.

     Section 6662(a) imposes a penalty equal to 20 percent of any

underpayment of tax that is attributable to substantial

understatement of income tax.    See sec. 6662(a) and (b)(2).   An

understatement of income tax 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).   An “understatement” is
                              - 12 -

defined as the excess of the tax required to be shown on the

return over the tax actually shown on the return.     Sec.

6662(d)(2)(A).   Tax is not understated to the extent that the

treatment of the item related thereto is based on substantial

authority or is adequately disclosed in the return or in a

statement attached to the return, and there is a reasonable basis

for the tax treatment of such item by the taxpayer.     Secs.

6662(d)(2)(B), 6664(c)(1).

     By virtue of section 7491(c), respondent has the burden of

production with respect to a section 6662 accuracy-related

penalty.   To meet this burden, respondent must produce sufficient

evidence indicating that it is appropriate to impose the relevant

penalty.   Higbee v. Commissioner, 116 T.C. at 446.    Once

respondent meets this burden of production, the taxpayer,

however, continues to have the burden of proof with regard to

whether respondent’s determination of the penalty is correct.

Rule 142(a); Higbee v. Commissioner, supra.   The taxpayer also

bears the burden of proving that he or she acted with reasonable

cause and in good faith.   See sec. 6664(c)(1); see also Higbee v.

Commissioner, supra; sec. 1.6664-4(b)(1), Income Tax Regs.

     In light of our conclusions above, as well as respondent’s

concession, respondent did not satisfy his burden of production

under section 7491(a)(1) because the record demonstrates that the

understatement of income tax was not substantial within the
                              - 13 -

meaning of section 6662(d)(1)(A)(ii).    Accordingly, we hold that

petitioners are not liable for the section 6662(a) accuracy-

related penalty.

                            Conclusion

     We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude that they are without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect our disposition of the disputed issues, as well

the parties’ concessions,



                                   Decision will be entered

                              under Rule 155.
