                    T.C. Summary Opinion 2001-131



                       UNITED STATES TAX COURT



             KHEN THI AND HONG VAN HUYNH, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 4388-99S, 1861-00S.         Filed August 30, 2001.


     Khen Thi and Hong Van Huynh, pro se.

     Michael S. Hensley, for respondent.



     COUVILLION, Special Trial Judge:    These consolidated cases

were heard pursuant to section 7463 in effect when the petitions

were filed.1    The decisions to be entered are not reviewable by

any other court, and this opinion should not be cited as

authority.




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


     In separate notices of deficiency, respondent determined

deficiencies of $1,552 and $1,515 in petitioners' Federal income

taxes for 1996 and 1997, respectively.

     The sole issue for decision is whether certain payments by

insurance companies during the years at issue of indebtedness

owing by petitioners on credit cards constitute gross income

under section 61(a).2

     Some of the facts were stipulated.   Those facts and the

accompanying exhibits are so found and are incorporated herein by

reference.   Petitioners' legal residence at the time the

petitions were filed was San Diego, California.

     During the years at issue, petitioners had several credit

cards that had been issued by various banks.   Petitioners availed

themselves of the opportunity to purchase credit card insurance

that provided for the payment of portions of indebtedness owing

on the credit cards in the event of death, disability, or

unemployment.   All indebtedness on the credit cards provided for

the accrual of interest in the event amounts due on each card

were not paid timely.   In addition, the premiums for the credit

card insurance were charged to each credit card.



     2
          Other adjustments were made to petitioners' Schedules
A, Itemized Deductions, some of which are computational and will
be resolved by the Court's holding on the matter at issue. All
other adjustments that are not computational were conceded by
petitioners.
                                - 3 -


     In May 1996, Khen Thi Huynh (petitioner) became unemployed.

He remained unemployed for the remainder of 1996 and throughout

1997.    Because of petitioner's unemployment, petitioners

satisfied one of the contingencies provided by the credit card

insurance policies they carried.    Accordingly, payments were made

during 1996 and 1997 by the insurance companies to the various

banks that had issued the credit cards in partial payment of

amounts due by petitioners on their credit cards.    As of the end

of 1996, petitioners owed a total of $91,333.25 on their credit

cards.    The record does not reflect the total amount owed as of

the end of 1997; however, that amount appears to have been

substantial.    During 1997, the interest accruing on and charged

to petitioners' credit cards totaled $12,949.27.    In addition,

during 1997, the credit card insurance premiums, all charged to

the credit cards, totaled $3,714.46.

     Pursuant to the terms of the credit card insurance

contracts, the various insurance companies paid $9,719 during

1996 and $9,631 during 1997 to the various banks in partial

payment of petitioners' credit card debts.    Petitioners did not

include these amounts as income on their Federal income tax

returns for 1996 and 1997.    In the notices of deficiency,

respondent determined that these amounts constituted gross

income.
                                - 4 -


     Petitioners have raised a variety of arguments that the

payments by the insurance companies do not constitute gross

income.   They contend that the factual situation here is

analogous to the situation where an insured automobile is damaged

in an accident.    The insurance company insuring the vehicle pays

the body shop for the cost of the repairs, and, in such a

situation, the payments do not constitute gross income to the

vehicle owner.    Moreover, petitioners argue, the payments at

issue were not unemployment benefits, and, additionally, since

the insurance payments approximately equaled the interest due on

the credit card liabilities and portions of the insurance

premiums, petitioners realized no economic benefits from the

insurance payments because the debts on each credit card remained

unpaid, and for which they remained liable.    Finally, petitioners

argue that they were not the beneficiaries on the insurance

contracts, and the banks were the beneficiaries.    Because

petitioners were not beneficiaries under the terms of the

insurance contracts, petitioners contend the amounts paid by the

insurance companies were not a benefit to them.

     Section 61 provides that gross income includes "all income

from whatever source derived," unless otherwise provided.     The

Supreme Court has consistently given this definition of gross

income a liberal construction "in recognition of the intention of

Congress to tax all gains except those specifically exempted."
                              - 5 -


Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955); see

also Roemer v. Commissioner, 716 F.2d 693, 696 (9th Cir. 1983),

revg. 79 T.C. 398 (1982) (all realized accessions to wealth are

presumed taxable income, unless the taxpayer can demonstrate that

an acquisition is specifically exempted from taxation).

Moreover, section 61(a)(12) provides that gross income includes

income from discharge of indebtedness.

     The record reflects that petitioners made substantial

purchases on their credit cards during 1996 and 1997.

Petitioners received goods or services for these purchases and,

therefore, realized economic benefits from such purchases.

Moreover, these purchases were paid for through the credit made

available to petitioners from the credit cards.    These credit

card purchases, therefore, provided petitioners with a source of

money or capital in order to make those purchases.    The interest

charged on each credit card represented the charge to petitioners

for the use of that money or capital.    The available credit,

therefore, was an economic benefit petitioners received.

Finally, the insurance premiums charged to the credit cards

provided additional economic benefits to petitioners if certain

conditions occurred, such as death, disability, or unemployment.

The unemployment condition did occur, and petitioners as a result

realized economic benefits by the amount of the payments the

insurance companies paid on petitioners' credit card liabilities
                                 - 6 -


during 1996 and 1997.   Finally, as a result of the payments by

the insurance companies, petitioners were relieved of the

obligation of paying $9,719 and $9,631 to the issuers of their

various credit cards.   In Amos v. Commissioner, 47 T.C. 65, 70

(1966), this Court stated:


     Although petitioner did not receive the amount directly from
     John Hancock Mutual Life Insurance Co., it is well settled
     that income is not limited to direct receipt of cash, Crane
     v. Commissioner, 331 U.S. 1 (1947); and that the payment of
     a legal obligation of a taxpayer is income to him even
     though such income is not actually received by him, Old
     Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929);
     and Schaeffer v. Commissioner, 258 F.2d 861, 864 (C.A. 6,
     1958), certiorari denied 360 U.S. 917. * * *


The Court, therefore, rejects petitioners' arguments.    All of the

charges on petitioners' credit cards represented economic

benefits petitioners received.    Petitioners were relieved of

their liabilities to the extent of the amounts paid by the

insurance companies during 1996 and 1997.    Respondent, therefore,

is sustained.3   Petitioners incorrectly contend that the

insurance payments on their credit cards are analogous to

insurance recovery amounts for damaged property (such as


     3
          At trial, counsel for respondent agreed that the income
amounts could be reduced or offset by the premiums charged to
petitioners for the insurance coverage for the benefits payable
arising from petitioners' unemployment. Petitioners failed to
establish the total amount of the premiums for the 2 years at
issue or the portion of such premiums allocable to the
unemployment risk (as distinguished from the premiums
attributable to death and disability).
                               - 7 -


automobiles) where, in the latter instance, the insurance

benefits do not constitute gross income.     That argument is

inappropriate to the facts of this case.     The general rule is

that the taxability of recovery payments depends upon the nature

of the claim.   If the recovery represents damages for lost

profits, the payment is considered income; however, if the

recovery represents a replacement of capital destroyed or

damaged, the recovery does not constitute taxable income to the

extent the recovery does not exceed the basis of the damaged or

destroyed property.   In the latter event, the recovery is a

restoration or return of capital.      State Fish Corp. v.

Commissioner, 48 T.C. 465, 473 (1967).     In this case, petitioners

had no basis in their credit card liabilities.     Therefore, the

payments by the insurance companies were not a recovery or

restoration of capital.   These payments were income.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                       Decisions will be entered

                               for respondent.
