                       T.C. Memo. 2001-252



                     UNITED STATES TAX COURT



                JOSEPHINE VELASCO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16368-99.               Filed September 21, 2001.


     Arsen Kashkashian, Jr., for petitioner.

     Russell K. Stewart, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge: Respondent determined a $22,011 deficiency and

additions to tax under sections 6651(a)(1) and (2) and 6654 in the

amounts of $4,883, $2,930, and $1,165, respectively, with respect

to petitioner’s 1996 Federal income tax.1



     1
          All section references are to the Internal Revenue Code
in effect for 1996.
                                     - 2 -

     The sole issue in dispute concerns the amount of commission

income petitioner must report as taxable income in 1996.

                             FINDINGS OF FACT

     Some    of   the    facts   have   been    stipulated   and     are   found

accordingly.      The stipulation of facts and the exhibits submitted

therewith are incorporated herein by this reference.

     At     the   time   petitioner     filed     her   petition     contesting

respondent’s determinations, she resided in Newtown, Pennsylvania.

     From 1990 to the year at issue, petitioner was a mortgage loan

officer for a bank.       From mid-1994 to 1997, petitioner also worked

part time as a real estate broker for the M. Riccardi Agency, owned

by Michael Riccardi (Mr. Riccardi).

     Before November 14, 1994, petitioner and her spouse owned, and

occupied as their residence, property located at 227 Aspen Road,

Yardley,    Pennsylvania     (the    Aspen     Road   property).      In   1994,

petitioner and her husband encountered financial problems, and the

bank holding the mortgage on the Aspen Road property threatened to

foreclose on the property.          As a consequence thereof, petitioner

approached Mr. Riccardi and suggested that he purchase the Aspen

Road property from the bank holding the mortgage.                  Mr. Riccardi

agreed to do so.         He made an offer to purchase the Aspen Road

property for $150,000; the bank rejected this offer.                Thereafter,

the bank foreclosed on the Aspen Road property, and the property
                                 - 3 -

was   ultimately   transferred   to   the    Federal   National   Mortgage

Association (Fannie Mae).

      After the transfer of the Aspen Road property to Fannie Mae,

petitioner again contacted Mr. Riccardi.           Petitioner told Mr.

Riccardi that if he purchased the Aspen Road property, she would

“take care of all expenses, maintain the property, and that after

a period of two years would either buy the property back or [they]

would sell it and split the profits, if there were any.”               Mr.

Riccardi understood that he would receive a minimum profit of

$20,000.    Relying on petitioner’s promises, Mr. Riccardi offered

Fannie Mae $170,000 for the Aspen Road property; this offer was

accepted.

      On November 14, 1994, Mr. Riccardi and petitioner signed a

lease agreement that permitted petitioner to occupy and use the

Aspen Road property for the 2-year period beginning January 1,

1995, and ending December 31, 1996.         The lease agreement required

petitioner to pay Mr. Riccardi a basic rent of $1,800 a month and

an amount equal to any increases in real estate taxes, fire

insurance premiums, and water and sewer charges.          The lease also

required petitioner to reimburse Mr. Riccardi for any damages or

costs that he might incur as a result of petitioner’s breach of her

obligations under the lease.

      Because of petitioner’s continued financial difficulties, she

failed to comply with her obligations under the lease.        She did not
                               - 4 -

pay any rent in January or February 1995.      Mr. Riccardi could not

afford to pay the mortgage and taxes on the Aspen Road property

without petitioner’s rent payment.     He used a line of credit to pay

the mortgage and taxes.   After petitioner failed to pay the first

month’s rent by February 1, 1995, Mr. Riccardi decided to sell the

Aspen Road property and listed it for sale. Petitioner paid $1,000

in March, $701.68 in May, and $1,000 in June 1995.

     In May or June 1995, petitioner listed a shopping center for

sale with the M. Riccardi Agency.    Mr. Riccardi thought he would be

able to recover the expenses he had incurred for the Aspen Road

property from petitioner’s share of the commission on the sale of

the shopping center.   Therefore, he took the Aspen Road property

off the market.   Petitioner paid $1,000 of rent in each of the

months of July, August, and November 1995.       She did not pay any

rent in 1996.

     Mr. Riccardi kept a log of the money he spent on the Aspen

Road property, including the downpayment on the purchase price,

closing costs, mortgage payments, taxes, costs associated with his

attempts to sell the property, and maintenance and repair costs.

The log shows that by the end of March 1996, the total expenses

exceeded the $5,701.68 of rent petitioner had paid by $22,300.

     The shopping center sold in 1996; it was the only property

petitioner sold for Mr. Riccardi in 1996.        The Riccardi Agency

received its $121,000 commission on March 28, 1996.      Mr. Riccardi
                                   - 5 -

allocated one-half ($60,500) of the commission to petitioner as her

share. Mr. Riccardi paid petitioner $14,000 on March 29, 1996.         At

that time he told her that $46,500 of the balance of her commission

would be retained by him and used to offset the expenses he had

incurred in excess of the rent petitioner had paid and the $20,000

profit   he   expected   from   the   Aspen   Road   Property.   He   paid

petitioner an additional $6,000 on August 13, 1996.

     In May or June 1996, Mr. Riccardi again listed the Aspen Road

property for sale.       Mr. Riccardi sold the Aspen Road property

before the end of 1996.         Petitioner was required to vacate the

Aspen Road property before settlement on the sale of the house.

She moved out of the property by the end of the year, after Mr.

Riccardi agreed to pay her moving expenses.              As a result of

petitioner’s failure to pay the monthly rent on the Aspen Road

property, Mr. Riccardi incurred more than $3,000 of additional

interest expenses and other costs.         In January 1997, Mr. Riccardi

paid $5,998.50 of petitioner’s moving expenses.

     The M. Riccardi Agency issued a Form 1099-Misc, Miscellaneous

Income, to petitioner reporting $60,500 of nonemployee compensation

in 1996.   In addition to the commission on the sale of the shopping

center, petitioner earned $6,199 in wages and $14 of interest.

     Petitioner did not file a Federal income tax return for 1996.

Respondent issued a notice of deficiency to petitioner based on

Forms 1099 and W-2, Wage and Tax Statement, and other documents
                                      - 6 -

received from third parties reflecting their payments to petitioner

in 1996.

                                     OPINION

     Petitioner does not contest respondent’s determinations as set

forth in the notice of deficiency, including the additions to tax,

except for $40,500 of the $60,500 reflected in a Form 1099 issued

to petitioner by the M. Riccardi Agency and used by respondent in

his determination of petitioner’s income. Respondent contends that

petitioner had $40,500 of income in 1996 either from the discharge

of indebtedness she owed Mr. Riccardi or by the constructive

receipt of the commission on the sale of the shopping center.                   We

agree with respondent.

     Section 61(a) defines “gross income” broadly, and specifically

includes    both   “compensation       for     services”   and    “income      from

discharge of indebtedness” within its meaning.             It is well settled

that where an employee owes a debt to the employer, crediting the

salary earned by the employee against the employee’s debt to the

employer,   without   any     cash   changing     hands,   is    income   to    the

employee.    See, e.g., Newmark v. Commissioner, 311 F.2d 913, 915

(2d Cir. 1962) (citing Old Colony Trust Co. v. Commissioner, 279

U.S. 716,    729   (1929)),    affg.    T.C.    Memo.   1961-285;    Tucker     v.

Commissioner, 69 T.C. 675 (1978); Cox v. Commissioner, T.C. Memo.

1996-241; Phillips v. Commissioner, T.C. Memo. 1993-514; Kelley v.

Commissioner, T.C. Memo. 1991-324, affd. without published opinion
                                   - 7 -

988 F.2d 1218 (11th Cir. 1993); Lehew v. Commissioner, T.C. Memo.

1987-389; Evans v. Commissioner, T.C. Memo. 1980-103; sec. 1.61-

12(a), Income Tax Regs.

      Here, the fact that the rent petitioner owed Mr. Riccardi was

paid out of the commission the M. Riccardi Agency owed petitioner

is   irrelevant.    See   Tucker    v.     Commissioner,   supra   at   678.

Receiving compensation in the form of cash is not a prerequisite to

the receipt of taxable income.             Id. at 679 (citing Cohen v.

Commissioner, 63 T.C. 267, 283 (1974), affd. per curiam 543 F.2d

725 (9th Cir. 1976)).     When petitioner’s debt to Mr. Riccardi was

satisfied, petitioner received an immediate economic benefit equal

to the amount of the debt used to satisfy the delinquent rental

obligation.   See id.

      Petitioner contends that the offset of the rent she owed to

Mr. Riccardi was not income because she disputed the amount she

owed to Mr. Riccardi.     On March 29, 1996, when Mr. Riccardi paid

petitioner $14,000 of the $60,500 commission, he told her that the

$46,500 balance was offset by expenses he had incurred with respect

to the Aspen Road property. Although petitioner may have disagreed

with Mr. Riccardi as to the amount she owed at that time, she

continued to occupy the house without paying rent and took no

action against Mr. Riccardi.

      Mr. Riccardi paid petitioner an additional $6,000 on August

13, 1996.   After the Aspen Road property was sold, and Mr. Riccardi
                                - 8 -

agreed to pay petitioner’s moving expenses, petitioner agreed to

vacate    the   property.   Nothing   in   the   record   indicates   that

petitioner took any action to compel Mr. Riccardi to pay her the

$40,500 balance of the commission or that petitioner contested the

matter.    Nor is there any evidence that Mr. Riccardi took any

action to compel petitioner to pay additional expenses he may have

incurred because of petitioner’s failure to pay rent.        The dispute

as to the amount of the remaining debt petitioner owed to Mr.

Riccardi and the remaining amount of commission Mr. Riccardi owed

petitioner apparently was resolved and settled by the end of 1996.

     Petitioner was obligated under the written lease to pay Mr.

Riccardi $1,800 per month from January 1, 1995, to December 31,

1996, for a total of $43,200 for the 24-month period.           Although

petitioner occupied the property and owed rent for the entire 24-

month term of the lease, she paid Mr. Riccardi only $5,701.68.

Thus, when she vacated the property at the end of 1996, she owed

Mr. Riccardi $37,498.32 of unpaid rent ($43,200 - $5,701.68).

Additionally, because petitioner failed to pay the rent when it was

due, Mr. Riccardi incurred more than $3,000 of additional interest

expense and costs for which petitioner was liable under the lease.

Consequently, petitioner owed Mr. Riccardi at least $40,500 by the

end of 1996.

     Petitioner earned a commission of $60,500 on the sale of the

shopping center in 1996.     The M. Riccardi Agency paid petitioner
                              - 9 -

$20,000.   The $40,500 balance owed to petitioner was credited

against the $40,500 debt petitioner owed to Mr. Riccardi in 1996.

To conclude, we hold that petitioner realized $60,500 of income as

commission income in 1996.

     To reflect the foregoing, and petitioner’s concessions,




                                           Decision will be entered

                                      for respondent.
