                  T.C. Summary Opinion 2006-87



                     UNITED STATES TAX COURT



              MARCIA ANN COPPERTINO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 5034-04S.              Filed May 24, 2006.


     Richard M. Hoffman, for petitioner.

     Stephen A. Haller, for respondent.



     COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.

     Respondent determined a deficiency of $12,356 in

petitioner’s Federal income tax for 2001, an addition to tax



     1
      Unless otherwise indicated, section references hereafter
are to the Internal Revenue Code in effect for the year at issue.
                                - 2 -


under section 6651(a)(1), and an accuracy-related penalty under

section 6662(a).

     The issues for decision are whether petitioner realized

discharge of indebtedness income under section 61(a)(12) and, if

so, the extent thereof under section 108(a), and whether

petitioner is liable for the section 6662(a) accuracy-related

penalty.2

     Some of the facts were stipulated.    Those facts and the

accompanying exhibits are so found and are incorporated herein by

reference.   Petitioner’s legal residence at the time the petition

was filed was Redondo Beach, California.

     For approximately 3 years, including the year at issue,

petitioner was employed as bookkeeper for a company that was

engaged in the promotion and selling of stock or interests in

mining companies.   For reasons not established at trial, the

activities of petitioner’s employer ran afoul of the United

States Securities and Exchange Commission (SEC), and, as the

result of a court proceeding, the activity was terminated.    Some

of the principals in the activity were charged criminally.

Petitioner was not charged with any criminal activity; however,

she was a defendant in a civil action by the SEC for the actions

of her employer.    Based on the claim that petitioner had received


     2
      At trial, petitioner conceded she is liable for the sec.
6651(a)(1) addition to tax if the Court sustains the deficiency.
                                 - 3 -


moneys from the illegal activity, petitioner was held civilly

liable for $67,820 in what was described by counsel at trial as a

“disgorgement”.3   No portion of the $67,820 has ever been paid,

and, during the year at issue, the SEC formally relieved

petitioner from the obligation of paying this indebtedness.   The

SEC issued to petitioner, for the year at issue, 2001, a Form

1099-C, Cancellation of Debt, in the amount of $67,820.45 for

what was described as “Default on payment of penalty,

disgorgement and interest”.

     Petitioner filed a Federal income tax return for 2001, which

was received by the Internal Revenue Service on August 22, 2002.

On that return, the only income item reported was a loss of

$3,128 from a Schedule C, Profit or Loss From Business.

Petitioner did not include as income the forgiveness of the

$67,820 debt owing to the SEC.

     In the notice of deficiency, respondent determined that the

$67,820.45 debt forgiveness by the SEC constituted gross income.

The principal issue considered at trial is whether petitioner is

absolved from liability for income tax on this forgiveness of

indebtedness because she was insolvent at the time the

indebtedness was forgiven.

     Gross income includes all income from whatever source


     3
      The word “disgorgement” is defined generally as giving up
illicit gains.
                                 - 4 -


derived.    Sec. 61(a).   Discharge of indebtedness is specifically

included as an item of gross income.     Sec. 61(a)(12).   This means

that a taxpayer who has incurred a financial obligation that is

later discharged or released has realized an accession to income.

United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); Friedman

v. Commissioner, 216 F.3d 537, 545 (6th Cir. 2000), affg. T.C.

Memo. 1998-196.    The rationale of this principle is that the

discharge of a debt effects the freeing of assets previously

offset by the liability.     Jelle v. Commissioner, 116 T.C. 63, 67

(2001) (citing United States v. Kirby Lumber Co., supra).

     Petitioner does not challenge the principle that discharge

of indebtedness constitutes gross income.     Her sole argument is

that she was insolvent at the time she was relieved of this

liability, and, therefore, the discharged indebtedness does not

constitute gross income.    Under section 108(a)(1)(B), gross

income does not include any amount that would be includable in

gross income by reason of the discharge of the indebtedness of

the taxpayer if the taxpayer was insolvent at the time the

indebtedness was discharged.

     On her Federal income tax return for 2001, the year at

issue, petitioner reported no wage or salary income or any other

income.    She reported a business loss of $3,128 on a Schedule C.

That activity was identified as The All American Herbal Health

Clinic.    In the notice of deficiency, respondent made no
                                - 5 -


adjustments to the income, expenses, or the loss of that activity

as reported by petitioner.   Respondent’s sole adjustment in the

notice of deficiency is that petitioner realized gross income

from the cancellation of indebtedness by the SEC.   Petitioner

contends she was insolvent and, therefore, did not realize gross

income from cancellation of the debt owing to the SEC.

     Section 108(a)(1)(B) provides that the discharge of

indebtedness does not constitute gross income when the taxpayer

is insolvent.   Respondent made no determination that petitioner

owned assets or had a net worth.   At trial, petitioner’s

testimony was that her only asset consisted of an old automobile.

It appears to the Court that the vehicle had only minimal value,

if any.    It was not established that petitioner owned a home or

any property, and she testified she virtually “lived out of her

car”.    Given this testimony, counsel for respondent acknowledged,

in response to the Court’s query, that respondent had “no

affirmative knowledge” of any assets owned by petitioner, and

this case was brought to trial “to at least see what she at one

time had and we believe that she could get”.    Respondent did not

develop at trial evidence of any assets owned by petitioner.     The

Court concludes that petitioner was insolvent and, therefore, is

entitled to relief under section 108(a)(1)(B) by reason of

insolvency.    Petitioner, therefore, is sustained on the principal

issue.    It follows, therefore, that petitioner is not liable for
                              - 6 -


the section 6662(a) accuracy-related penalty on underpayment of

tax, since there was no underpayment of tax.   Even though

petitioner admitted that her income tax return for 2001 was not

filed timely, she, nonetheless, is not liable for the section

6651(a)(1) addition to tax because the addition to tax is based

on a percentage of the tax “required to be shown on the return”.

Since the Court holds that petitioner had no tax liability, it

follows that petitioner is not liable for the section 6651(a)(1)

addition to tax.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

+                                     for petitioner.
