                              T.C. Memo. 2016-125



                        UNITED STATES TAX COURT



                KEITH A. NEWMAN, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 2416-14.                         Filed June 28, 2016.



      James R. Monroe, for petitioner.

      Anne M. Craig, Sean P. Deneault, and Lauren B. Epstein, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: Respondent issued a notice of deficiency determining a

$4,012 deficiency in petitioner’s 2011 Federal income tax. After concessions,1 the



      1
         For 2011 petitioner conceded receiving $598 in wages from the U.S.
Postal Service and $622 in wages from Youth Advocate programs and that he was
not entitled to an education credit of $2,075.
                                         -2-

[*2] remaining issues for decision are: (1) whether petitioner received $7,875 in

cancellation of debt income (COD income) during 2011 and (2) whether petitioner

is entitled to exclude any COD income received during 2011 under the insolvency

exception provided in section 108(a)(1)(B).2

                                FINDINGS OF FACT

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

facts and the attached exhibits are incorporated by this reference. At the time the

petition was filed, petitioner resided in Florida.

      In July 2008 petitioner opened a checking account at Bank of America.

Between July and August petitioner made deposits totaling $8,857.95 into the

bank account. Of the total deposits, $8,500 was attributable to a single check

drawn from another bank account petitioner maintained at Wells Fargo. Shortly

after making the initial deposits petitioner withdrew $8,000 in cash from the Bank

of America account. However, the initial $8,500 check petitioner deposited into

the Bank of America account did not clear and was later returned to Wells Fargo.

This caused the Bank of America account to be overdrawn. Petitioner did not




      2
       Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                          -3-

[*3] deposit funds in the Bank of America account to correct the negative balance.

Consequently, Bank of America closed the account in August 2008.

         In 2011 petitioner owned various items of personal property including

furniture, clothes, and electronics of marginal value; he owned two watches valued

at $500; and he owned a car valued at $35,000. Petitioner also had several

liabilities in 2011--he owed $35,000 on a car loan, and he owed $15,000 in student

loans.

         In December 2011 Bank of America issued to petitioner a Form 1099-C,

Cancellation of Debt, for 2011 reporting COD income of $7,875. Petitioner did

not report the $7,875 as income on his 2011 Federal income tax return. On

November 12, 2013, the IRS issued petitioner the notice of deficiency determining

that the $7,875 of COD income constituted unreported gross income. Petitioner

timely filed a petition with this Court for redetermination.

                                       OPINION

I.       Cancellation of Debt Income

         The first issue to resolve is whether petitioner received $7,875 of COD

income for 2011.

         Gross income generally includes income from the discharge of

indebtedness. Sec. 61(a)(12). The rationale of this principle is that the
                                        -4-

[*4] cancellation of indebtedness provides the debtor with an economic benefit

that is equivalent to income. See United States v. Kirby Lumber Co., 284 U.S. 1

(1931); Friedman v. Commissioner, 216 F.3d 537, 545 (6th Cir. 2000), aff’g T.C.

Memo. 1998-196; see also sec. 108.

      The year for which a taxpayer realizes COD income is a question of fact to

be determined on the basis of the evidence. See Policy Holders Agency, Inc. v.

Commissioner, 41 T.C. 44, 47 (1963); Callan Court Co. v. Commissioner, T.C.

Memo. 1965-261. A debt is deemed discharged the moment it becomes clear that

the debt will never be repaid. Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).

“Any ‘identifiable event’ which fixes the loss with certainty may be taken into

consideration.” Id. (citing United States v. S.S. White Dental Mfg. Co., 274 U.S.

398 (1927)); see also 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 the expiration of a 36-month

nonpayment testing period).

      A bookkeeping entry by a creditor does not result in COD income. See

Kleber v. Commissioner, T.C. Memo. 2011-233, slip op. at 7 (citing Cozzi v.

Commissioner, 88 T.C. 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.
                                        -5-

[*5] Commissioner, T.C. Memo. 2002-253, aff’d in part, rev’d in part, and

remanded, 67 F. App’x 253 (5th Cir. 2003). There is a rebuttable presumption that

an identifiable event occurred in a calendar year if, during a testing period

(generally 36 months) ending at the close of the year, the creditor has received no

payments from the debtor. Sec. 1.6050P-1(b)(2)(iv), Income Tax Regs.

      The bank records reflect that all account activity leading to the overdrawn

account occurred within a one-month period in 2008. Bank of America did not

receive any payments from petitioner after August 2008. Therefore, the 36-month

nonpayment testing period under section 1.6050P-1(b)(2)(iv), Income Tax Regs.,

began in August 2008 and ended at the close of 2011. Because Bank of America

did not receive any payments during this testing period, a rebuttable presumption

has arisen that the debt was discharged in 2011.

      Petitioner has not rebutted the presumption that the debt was discharged in

2011. Therefore, because he has not rebutted the presumption of discharge of

indebtedness, and because the Form 1099-C was issued in 2011, we find that

petitioner had COD income of $7,875 for 2011.
                                         -6-

[*6] II.     Insolvency Exception

       Now that we have found that petitioner had COD income for 2011, we must

determine whether the COD income is excludable from his gross income under the

insolvency exception provided in section 108(a)(1)(B).

       Section 108(a)(1)(B) excludes COD income from gross income if the

discharge of indebtedness occurs when the taxpayer is insolvent. The amount by

which the taxpayer is insolvent is defined as the excess of the taxpayer’s liabilities

over the fair market value of the taxpayer’s assets. Sec. 108(d)(3). Whether a

taxpayer is insolvent and by what amount is “determined on the basis of the

taxpayer’s assets and liabilities immediately before the discharge.” Id. The

amount of income excluded under section 108(a)(1)(B) cannot exceed the amount

by which the taxpayer is insolvent. Sec. 108(a)(3).

       As stated earlier, petitioner owned assets in 2011 valued at a total of

$35,500. Petitioner was also liable for debts totaling $50,000. Therefore, after

netting assets and liabilities, petitioner’s claimed amount of insolvency is $14,500.

       Insolvency is a question of fact. See Toledano v. Commissioner, 362 F.2d

243, 245 (5th Cir. 1966), aff’g T.C. Memo. 1963-200; Smith v. Commissioner,

249 F.2d 218, 220, 221 (5th Cir. 1957), aff’g T.C. Memo. 1955-183; Estate of

Phillips v. Commissioner, 246 F.2d 209, 213-214 (5th Cir. 1957), rev’g T.C.
                                        -7-

[*7] Memo. 1955-139. Petitioner has the burden of proving his claim that he was

insolvent. See Rule 142(a). At trial petitioner provided credible testimony that his

assets and liabilities were what he claimed they were. Therefore, we accept

petitioner’s claimed amount of insolvency and find that his liabilities at the end of

2011 exceeded his assets by $14,500. We also find that section 108(a)(1)(B)

allows petitioner to exclude all $7,875 of COD income from his 2011 gross

income because the amount of his insolvency in 2011 exceeded his COD income

for 2011.

      In reaching our holdings herein, we have considered all arguments made,

and to the extent not mentioned above, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                    Decision will be entered

                                              under Rule 155.
