                     T.C. Summary Opinion 2011-73



                        UNITED STATES TAX COURT



              THOMAS F. AND WENDY LIOTTI, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 10194-08S.           Filed June 20, 2011.



        Thomas F. Liotti, for petitioners.

     Monica E. Koch, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.    Pursuant to section 7463(b),

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

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent determined a deficiency of $3,892 in petitioners’

Federal income tax for 2005.   The issue for decision is whether

petitioners are liable for unreported discharge of indebtedness

(DOI) income.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by reference.1     Petitioners resided in New

York when they filed their petition.

     During the year in issue Thomas F. Liotti (petitioner) was

an attorney in New York.   At the time of trial petitioner was

admitted to practice before this Court.     He had held a credit

card account with MBNA America Bank N.A. (MBNA) since 1985.

Petitioner’s account was sponsored by the New York State Bar

Association; his name was the only name on the account.     At the

time of trial petitioner had not used the account for several

years.   Over the course of 2004 and 2005 petitioner sent letters

to MBNA in which he discussed the amount he felt he rightfully


     1
      Petitioner Wendy Liotti did not sign the stipulation of
facts, nor did she appear at trial. Petitioner Thomas F. Liotti
stated that he represented himself and his wife and that she was
listed as a petitioner solely because the couple filed a joint
Federal income tax return for the year in issue. This case is
considered submitted on the part of both petitioners. See Rule
149(a).
                                - 3 -

owed.    There are no responses from MBNA to petitioner’s letters

in the record.    At some point in 2005 petitioner and MBNA agreed

that petitioner would pay $5,200 to settle his account.

Petitioner made the final payment toward the settlement in July

2005.    Petitioner’s credit card statement with a closing date of

September 21, 2005, reflects a finance charge adjustment of

$244.47 and a “charge off” of $11,974.65.    MBNA provided the

Internal Revenue Service a Form 1099-C, Cancellation of Debt,

which reflected a cancellation of petitioner’s debt of $11,974.65

for 2005.    Petitioner denied that he received a Form 1099-C from

MBNA for 2005.

     Petitioners did not include the $11,974.65 as income on

their 2005 joint Federal income tax return.    Respondent sent

petitioners a notice of deficiency that included the $11,974.65

in petitioners’ income for 2005 and determined a deficiency of

$3,892.2    After the notice was issued, petitioner paid the tax

and interest shown due on the notice.3




     2
      Other changes determined in the notice of deficiency were
computational and will not be discussed.
     3
      The payment of tax after the mailing of a notice of
deficiency shall not deprive the Court of jurisdiction over such
deficiency. See sec. 6213(b)(4); Hazel v. Commissioner, T.C.
Memo. 2008-134. The Court also has jurisdiction to determine an
overpayment in a deficiency proceeding. See sec. 6512(b)(1).
                                   - 4 -

                                Discussion

I.    Burden of Proof and Production

       Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.      Rule 142(a); see INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).      The burden of proof for factual matters

may be shifted to the Commissioner under section 7491.

Petitioner has not alleged that section 7491 applies.

       If an information return, such as a Form 1099-C, is the

basis for the Commissioner’s determination of a deficiency,

section 6201(d) may apply to shift the burden of production to

the Commissioner if in any court proceeding the taxpayer asserts

a reasonable dispute with respect to the income reported on the

information return and the taxpayer has fully cooperated with the

Commissioner.       See McQuatters v. Commissioner, T.C. Memo. 1998-

88.    As discussed infra, petitioner has failed to assert a

reasonable dispute with respect to the income reported on the

Form 1099-C.

       Thus there is no burden shift under either section 7491 or

6201(d).

II.    DOI Income

       Gross income includes all income from whatever source

derived.    Sec. 61(a).    DOI is specifically included as an item of
                                  - 5 -

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.        Id.; United States

v. Kirby Lumber Co., 284 U.S. 1, 3 (1931).       The rationale of this

principle is that the discharge of a debt for less than its face

value accords the debtor an economic benefit equivalent to

income.   United States v. Kirby Lumber Co., supra at 3; Friedman

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

Memo. 1998-196.   Accordingly, when a taxpayer’s obligation to

repay a debt is settled for less than the face value of the debt,

he ordinarily realizes DOI income.        Sec. 61(a)(12); see Warbus v.

Commissioner, 110 T.C. 279, 284 (1998) (citing Vukasovich, Inc.

v. Commissioner, 790 F.2d 1409, 1413-1414 (9th Cir. 1986), affg.

in part and revg. in part T.C. Memo. 1984-611).       Accrued interest

that is discharged through a settlement is considered DOI income.

Payne v. Commissioner, T.C. Memo. 2008-66, affd. 357 Fed. Appx.

734 (8th Cir. 2009); see sec. 1.6050P-1(c), Income Tax Regs.

     Accompanying the DOI rule are certain exclusions from gross

income.   Sec. 108(a)(1).   Petitioner does not argue that any of

the exclusions apply; thus the Court does not consider them.

     Petitioner contends that he did not have DOI income on the

basis that:   (1) The amount he owed MBNA was in dispute (a

contested liability); (2) the amount of interest MBNA was

charging him was usurious; and (3) he did not receive a Form
                               - 6 -

1099-C from MBNA and did not know that there would be any tax

ramifications for settling his account for less than the full

amount of his MBNA account balance.

     One exception to the general DOI rule is the “contested

liability” doctrine, under which DOI income will be disregarded

when computing gross income if the taxpayer disputes the original

amount of a debt in good faith and the debt is subsequently

settled.   Preslar v. Commissioner, 167 F.3d 1323, 1327 (10th Cir.

1999) (citing Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir.

1990)), revg. T.C. Memo. 1996-543.     A taxpayer’s good faith

challenge to the enforceability of a debt does not necessarily

shield him from DOI income when the dispute is resolved.     Preslar

v. Commissioner, supra at 1328; see also Rood v. Commissioner,

T.C. Memo. 1996-248, affd. without published opinion 122 F.3d

1078 (11th Cir. 1997).   “To implicate the contested liability

doctrine, the original amount of the debt must be unliquidated.

A total denial of liability is not a dispute touching upon the

amount of the underlying debt.”   Preslar v. Commissioner, supra

at 1328.   Additionally, the fact that a settlement is for less

than the full amount of a taxpayer’s debt is insufficient to

establish that the debt was disputed.     Melvin v. Commissioner,

T.C. Memo. 2009-199 (citing, e.g., Rood v. Commissioner, supra).

Petitioner has not shown a challenge to the original amount of

the underlying debt.
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     Petitioner entered into evidence several letters that he

wrote to MBNA in which he argues that he does not owe the amount

listed as the balance of his account.   Petitioner believed that

he had paid more in interest than the underlying principal

balance of the account because he had not used the account for a

number of years.4   In a letter dated November 30, 2004,

petitioner contends that he has paid more than $16,000 “on the

underlying obligation”. (Emphasis added.)    In the same letter he

also contends that he does not owe MBNA $16,387.78.   In a letter

dated January 18, 2005, petitioner writes that his account

balance as of December 19, 1998, was $25,168.88.   He then

contends that between December 19, 1998, and December 20, 2002,

he had paid MBNA $26,606 and had made additional payments since

2002.    Petitioner also documents the rise in the interest rate of

his account in the January 18, 2005, letter.   In a letter dated

March 8, 2005, petitioner writes that he has paid MBNA a total of

$34,451 but that he is not certain how much of that amount was

penalties and interest as opposed to principal.

     Petitioner’s contention that the debt is contested is

incorrect.    Petitioner has made no argument against the original

amount of his debt.   See Preslar v. Commissioner, supra at 1327.

Through petitioner’s letters to MBNA it is clear that his


     4
      Petitioner cited both 1998 and 2001 as the last year that
the account had been used.
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argument is with the amount of interest he is being charged, not

the underlying debt.    Petitioner admits to making payments on the

underlying obligation in his letters and never argues that he did

not incur the charges on the account or that he did not owe the

principal balance of the account.   The interest charged to

petitioner’s account is part of his debt obligation.   See Payne

v. Commissioner, supra.    Interest is included in the definition

of indebtedness.    Sec. 1.6050P-1(c), Income Tax Regs.; cf. Payne

v. Commissioner, supra.    Petitioner’s challenge to the amount of

interest he is charged does not rise to a contested liability.

     Coupled with, and seemingly a second prong of, petitioner’s

contested liability argument is his argument that the interest

MBNA charged was usurious under New York law and the discharge of

such interest should, therefore, not be income to him.

     Petitioner testified and mentioned in more than one letter

admitted into evidence that the usury rate of interest in New

York was 25 percent.5   All of the credit card statements that

petitioner entered into evidence reflect an annual interest rate

of 22.98 percent.   While this interest rate is high, it does not




     5
      Petitioner has taken on the mantle of protecting all
consumers from the aggressive tactics of the credit card
companies and even informed the Court that he was “here, Judge,
for the American people, as well as for myself.”
                                - 9 -

reach the level of what petitioner claims is usurious in New

York.6

     Petitioner also argues that he never received a Form 1099-C

from MBNA and did not know that there would be any tax

ramifications for settling his debt for less than the full

amount.    “The moment it becomes clear that a debt will never have

to be paid, such debt must be viewed as having been discharged.”

Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).    The nonreceipt

of a Form 1099 does not convert a taxable item into a nontaxable

item.    Vaughn v. Commissioner, T.C. Memo. 1992-317, affd. without

published opinion 15 F.3d 1095 (9th Cir. 1993).   Any identifiable

event that fixes the loss with certainty may be taken into

consideration.    Cozzi v. Commissioner, supra at 445 (citing

United States v. S.S. White Dental Manufacturing Co., 274 U.S.

398 (1927)); cf. sec. 1.6050P-1(b)(2)(i)(F), Income Tax Regs.

(listing a discharge of indebtedness pursuant to an agreement

between an applicable entity and a debtor to discharge

indebtedness at less than full consideration as one of the eight

exclusive “identifiable events” under which debt is discharged

for information reporting purposes).



     6
      Even if petitioner had made a “good faith” challenge to the
interest rate, that alone would not “shield” him from DOI income.
See Preslar v. Commissioner, 167 F.3d 1323, 1328 (10th Cir.
1999), revg. T.C. Memo. 1996-543. Petitioner does not know how
much of his account balance was interest as opposed to principal.
                                - 10 -

     Petitioner is an attorney and a member of the Tax Court bar

with legal acumen and a fundamental knowledge of legal research.

The fact that petitioner did not know that there were tax

ramifications associated with settling a debt for less than its

face value does not negate his enjoyment of the economic benefit

from the discharge of his debt.    See sec. 61(a)(12); United

States v. Kirby Lumber Co., 284 U.S. 1 (1931).

                            Conclusion

     Petitioner has failed to prove that there was a contested

liability concerning his MBNA account.      Petitioner’s failed

usurious interest argument, his lack of receipt of a Form 1099-C,

and his lack of knowledge of DOI income tax ramifications do not

negate the fact that he received a discharge of debt that

resulted in income.   Therefore, the $11,974.65 of petitioner’s

MBNA account balance that was discharged is income to petitioners

and should have been included on their 2005 joint Federal income

tax return.

     We have considered petitioner’s arguments, and, to the

extent not mentioned, we conclude the arguments to be moot,

irrelevant, or without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                  for respondent.
