                       T.C. Memo. 1996-83



                     UNITED STATES TAX COURT



                 JAMES P. WHITMER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 1135-95.              Filed February 26, 1996.



    Frederick M. Cuppy, Todd A. Etzler, and Edward L. Burke,

for petitioner.

     Ronald T. Jordan, for respondent.



          P guaranteed the obligation of M, his wholly owned
     corporation, under M’s contracts with I. Pursuant to
     these contracts, I paid advance commissions to M and
     its agents for insurance policies that they sold, and
     M had to repay these commissions if the policies lapsed
     or were canceled. After I terminated its business
     relationship with P and M, I sued M for repayment of
     advance commissions and loans. P was named as a
     co-defendant because he guaranteed the debt. P and M
     countersued for reasons that were essentially unrelated
     to P’s claim. In settlement of the litigation, the
                                 - 2 -

     parties agreed to release all claims related to their
     business relationship, and P agreed to pay I $25,000.
     When the agreement was reached, M owed I $182,295.
     Held: P did not realize cancellation of debt income on
     account of the release.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   James P. Whitmer petitioned the Court to

redetermine respondent’s determination with respect to his 1987

and 1988 Federal income taxes.    For 1987, respondent determined a

$76,005 deficiency, a $3,800 addition to tax under section

6653(a)(1)(A), and a $19,001 addition to tax under section

6661(a).   Respondent also determined that petitioner was liable

for an addition to tax under section 6653(a)(1)(B).     For 1988,

respondent determined a $17,257 deficiency and a $4,314 addition

to tax under section 6661(a).

     Following concessions, the only issue left for decision is

whether petitioner realized cancellation of debt (COD) income in

1987, on account of a settlement of a judicial proceeding in

which he was a party.   We hold he did not.   Unless otherwise

stated, section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.    Dollar amounts are

rounded to the nearest dollar.
                               - 3 -

                         FINDINGS OF FACT1

     Petitioner resided in Chicago, Illinois, when he petitioned

the Court.   His business is insurance sales, and he has been in

this business since 1969.   Petitioner and his wife, Lucia A.

Whitmer, filed a 1987 Form 1040, U.S. Individual Income Tax

Return, using the status of “Married filing joint return”.

Although respondent’s notice of deficiency for the 1987 taxable

year was issued to both petitioner and Lucia A. Whitmer,

Mrs. Whitmer did not petition the Court with respect thereto,

and, accordingly, she is not a party here.

     Petitioner formed a wholly owned corporation, Whitmer

Agency, Inc. (Whitco), on or about September 16, 1974, to issue

life and health insurance policies and annuities.   Petitioner was

Whitco’s president, and, in that capacity, he entered into a

“General Agent’s Contract” (Agent’s Contract) with ITT Life

Insurance Corp. (ITT) on October 22, 1981.   Petitioner personally

guaranteed Whitco’s performance under the Agent’s Contract.

Petitioner, in his capacity as Whitco’s president, also entered

into an “Advance Commission and Loan Agreement for General Agent”

(Agreement) with ITT on November 19, 1981.   Petitioner personally

guaranteed Whitco’s performance under the Agreement.   The Agent’s

Contract and the Agreement authorized Whitco to solicit and


     1
       Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the attached exhibits
are incorporated herein.
                               - 4 -

procure applications for life and health insurance and annuities

on behalf of ITT.

     Petitioner subsequently changed Whitco’s name to Midwest

Agencies, Inc. (Midwest).   On or about July 29, 1982, petitioner,

in his capacity as Midwest’s president, entered into a “General

Agent’s Contract” and an “Advance Commission and Loan Agreement

for General Agent” with ITT.   This contract and agreement were

identical to the Agent’s Contract and the Agreement, and

hereinafter will be referred to as such.    Petitioner personally

guaranteed Midwest’s performance under the Agent’s Contract and

the Agreement.

     Whitco and Midwest engaged agents, including petitioner, to

sell insurance products on a commission basis.   ITT’s insurance

products (e.g., life insurance policies) were among these

products.   Under the Agreement, ITT paid commissions to Midwest

(and its predecessor Whitco) and its agents.   When an agent sold

a policy, he or she received from ITT a commission that

approximated the total commissions that would be earned over the

life of the policy (including renewals).    The unearned portions

of the commissions were considered loans.   If the policy was

later renewed, the commission on the renewal that would otherwise

have gone to the agent was applied to reduce the advance (or

unearned) commissions that were previously paid to the agent.

If the policy lapsed or was canceled, the portion of the

commissions remaining unearned on the policy was treated as a
                               - 5 -

liability of Midwest (or Whitco).2     ITT maintained accounts to

document the advance commissions that it had paid to its agents,

as well as to monitor the later events that would affect these

commissions.

     ITT, Midwest, and petitioner terminated their business

relationship in July 1983.   On August 3, 1983, ITT filed suit

against petitioner, Midwest, and Whitco (collectively referred to

as Defendants), for repayment of advance commissions and loans

(ITT litigation).   ITT alleged, in part, that Midwest owed ITT:

(1) Approximately $237,000 in advance commissions, derived from

policies which were under imminent threat of cancellation by the

policyholders, (2) $32,068 with respect to two loans,3 and

(3) $100,000 in exemplary and punitive damages.     Petitioner was

named as a defendant because he guaranteed all of Midwest’s

obligations to ITT.

     In or about September 1983, the Defendants answered the

complaint, generally denying each material allegation therein.

On or about July 23, 1984, the Defendants filed a counterclaim

     2
       Under the Agent's Contract and the Agreement, ITT could
cancel its policies and refund the corresponding premiums, and
Midwest would be liable for repayment of the unearned commissions
on the premiums.
     3
       On or about Nov. 11, 1982, Midwest had borrowed $4,700
from ITT, and on or about Feb. 9, 1983, Midwest had borrowed
$30,000 from ITT. The $4,700 loan was repayable (with interest)
in 12 monthly payments of $413.20, the first payment due on
Jan. 1, 1983. The $30,000 was repayable (without interest) on
demand, but the entire loan would be forgiven if Midwest met
certain life and health insurance quotas.
                               - 6 -

against ITT for breach of contract, defamation of business

reputation, and wrongful interference with business

relationships.   In relevant part, the counterclaim alleged that

the Defendants had suffered:   (1) $18 million in losses because

they were terminated as general agent for ITT, (2) $7.5 million

of compensatory damages and $30 million of punitive damages on

account of defamatory statements published about them by ITT,

(3) $30,000 of compensatory damages and $5 million of punitive

damages because ITT had deceived the Defendants into signing the

promissory notes underlying the $30,000 loan mentioned above,

(4) $18 million of actual damages and $15 million of punitive

damages because ITT had secretly met with many of the Defendants’

employees and had persuaded the employees to terminate their

employment with the Defendants, and (5) $18 million of actual

damages and $15 million of punitive damages because ITT

maliciously persuaded the Ohio Department of Insurance to

investigate the Defendants and to refuse to transfer the

Defendants’ insurance licenses to other insurance companies.

     On or about February 1, 1987, the parties to the ITT

Litigation settled the litigation by signing an agreement of

settlement and mutual release (Release).   Under the Release, the

parties agreed to release all claims arising or which could have

arisen in the litigation, and petitioner agreed to pay ITT

$25,000.   Midwest had been dissolved in 1983, and petitioner was

the only one of the Defendants from whom collection was feasible.
                                - 7 -

When the agreement was reached, Midwest owed ITT $182,295, which

was attributable to the following:

     Commissions on refunded premiums or
       refundable commissions on lapsed policies      $151,469
     Unearned advance commissions                          826
     Loans                                              30,000
       Total                                          $182,295

                               OPINION

     1.   Preliminary Matter

     At trial, the Court instructed each party’s counsel to file

briefs that adhered to the Tax Court Rules of Practice and

Procedure.   Petitioner has filed both an opening brief and an

answering brief, as has respondent.      Petitioner’s opening brief

does not comply with Rule 151(e), with respect to his proposed

findings of fact.   Whereas Rule 151(e)(3) states that “there

shall be inserted references to the pages of the transcript or

the exhibits or other sources relied upon to support * * * [a

party’s proposed findings of fact]”, petitioner’s brief does not

refer us to the source of his proposed findings.     At trial, the

Court reminded each counsel of the need to file opening briefs

containing references to the record to support proposed findings

of fact, as well as answering briefs referencing objections to

the other party’s proposed findings.
                                 - 8 -

     In her answering brief, respondent objects to many of

petitioner's proposed findings of fact as not being supported by

evidence in the record.     Because petitioner has made it virtually

impossible for the Court to verify any of his proposed findings

that were objected to by respondent, and because he has violated

Rule 151(e)(3), the Court, in making its findings, has

disregarded all of petitioner's proposed findings to which

respondent has objected.4    See Van Eck v. Commissioner,

T.C. Memo. 1995-570.    In the future, we admonish petitioner’s

counsel to adhere to our Rules of Practice and Procedure in

matters before this Court.

     2.    Taxability of Proceeds

     Respondent determined that ITT forgave $212,000 of a

$237,000 debt that petitioner owed it, in return for a payment of

$25,000.    Thus, respondent determined, petitioner realized

$212,000 of COD income, and he should have recognized this amount

in 1987.    Petitioner must prove respondent’s determination




     4
       We note, however, that our review of the record, taking
into account the credibility of the witnesses, would not
otherwise have allowed us to make findings in accordance with any
of petitioner’s proposed findings of fact to which respondent
objected.
                                - 9 -

wrong.5   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Petitioner relies mainly on N. Sobel, Inc. V.

Commissioner, 40 B.T.A. 1263 (1939), and its progeny, and

contends on brief that he had no COD income in 1987 because the

$237,000 debt mentioned in the complaint was:     (1) Unenforceable

due to the fraudulent acts of ITT, (2) always subject to a bona

fide dispute, and (3) not liquidated until the settlement.

Petitioner’s counsel stated in his opening statement that the

$25,000 payment referenced in the Release represented the actual

amount that Midwest owed ITT.

     We agree with petitioner that he does not have COD income,

but we do so for different reasons.     It is hornbook law that

gross income includes income from the discharge of debt, and that

a taxpayer may realize COD income by paying an obligation at less

than its face value.6   Sec. 61(a)(12); United States v. Kirby


     5
       Respondent introduced evidence at trial to establish the
amount of the debt that ITT forgave in the ITT Litigation.
Respondent concedes that this evidence shows that the debt
declined from $237,000 on the date of the complaint to $182,295
on the date of the Release.
     6
       A cancellation of debt generally produces income to the
debtor 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, the entire amount of
the debt is usually considered the amount of income that must be
recognized by the debtor. Sec. 61(a)(12); Babin v. Commissioner,
                                                   (continued...)
                               - 10 -

Lumber Co., 284 U.S. 1 (1931); see also Lehew v. Commissioner,

T.C. Memo. 1987-389 (COD includes the relinquishment of a right

to the repayment of advance insurance commissions or commissions

related to refunded premiums).    It does not naturally follow from

this firmly established law, however, that a guarantor such as

petitioner will always realize COD income on the discharge of a

primary obligor’s debt.    We have found no case in which a

guarantor such as petitioner realized COD income from a discharge

of debt.    In Kirby Lumber, the seminal case on COD income, the

debtor was primarily liable for the debt.

     Respondent relies on Bradford v. Commissioner, 233 F.2d 935

(6th Cir. 1956), revg. 22 T.C. 1057 (1954), and Tennessee

Securities, Inc. v. Commissioner, 674 F.2d 570 (6th Cir. 1982),

affg. T.C. Memo. 1978-434, to support her determination that

petitioner realized COD income on the cancellation of Midwest’s

obligation to ITT.    We do not read these cases to support

respondent’s determination, and she has not otherwise convinced

us that the rationale of Kirby Lumber applies to the facts at

hand.    Midwest obtained a nontaxable increase in assets on

account of its debt to ITT.    Petitioner did not.   To be sure,



     6
      (...continued)
23 F.3d 1032, 1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.
                               - 11 -

petitioner intended as Midwest’s sole shareholder to derive some

benefit from the arrangement with ITT.    The hard fact remains,

however, that the commissions and the loan proceeds that were the

subject of the debt went to Midwest, and they did not go into

petitioner’s pocket.    ITT’s forgiveness of its debt to Midwest

also did not increase petitioner’s net worth.    It merely

prevented petitioner’s net worth from being decreased.       Landreth

v. Commissioner, 50 T.C. 803, 812-813 (1968).

     Under the facts at hand, we hold that petitioner did not

realize COD income on account of the Release.    In so holding, we

have considered all arguments made by respondent for a contrary

holding and, to the extent not discussed above, have found them

to be without merit.7

     To reflect the foregoing,

                                                Decision will be

                                          entered under Rule 155.



     7
       As an alternative to her main argument, respondent argues
that petitioner received taxable damage income paid through a
discharge of indebtedness in 1987. According to respondent,
petitioner's liability under his guarantee was reduced by
nonexcludable amounts that he was entitled to receive on account
of the Defendants' Counterclaim in the ITT litigation.
Petitioner has moved the Court to place the burden of proof on
respondent, with respect to this argument. For reasons similar
to above, we reject respondent’s alternative argument. We shall
deem petitioner’s motion to be moot.
