                  T.C. Summary Opinion 2006-16



                     UNITED STATES TAX COURT



         MILLARD J. AND JACQUIE M. SCOTT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8110-04S.              Filed January 30, 2006.


     Millard J. and Jacquie M. Scott, pro sese.

     Charles J. Graves, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent 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.
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     Respondent determined a deficiency in petitioners’ Federal

income tax of $865 for the taxable year 2001.

     The issue for decision is whether petitioners received

discharge of indebtedness income of $6,583 in taxable year 2001,

which they failed to report.   We hold that they did.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Eagar, Arizona, on the date the petition was filed in this case.

     From March 2000 through November 2001, petitioners had three

joint credit cards issued to them by MBNA America Bank N.A.

(MBNA).   A statement of accounts with a closing date of July 12,

2001, showed the balance due MBNA on these accounts consisting of

credit card charges, balance transfers, checks, interest,

operation charges, and penalties totaled $20,645.39.    Petitioners

secured a loan from a bank, not identified in the record, to pay

off their credit card debt, in an attempt to consolidate their

liabilities.   Petitioners, on August 21, 2001, made a payment of

$14,937.26 to MBNA for settlement of their accounts.    MBNA

received said payment of $14,937.26 on August 21, 2001.    As a

result of this settlement transaction, MBNA issued a Form 1099-C,

Cancellation of Debt, to petitioners for taxable year 2001.

Also, MBNA filed with respondent a Form 1099-C with respect to
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petitioners.   The Form 1099-C reported August 28, 2001, as the

date of the cancellation of debt and $6,583.34 as the amount of

debt canceled.

     Petitioners were not insolvent in 2001, nor did they file

for bankruptcy during that year.

     Petitioners timely filed their Form 1040, U.S. Individual

Income Tax Return, for the taxable year 2001.     Petitioners did

not report any part of the cancellation of indebtedness on their

2001 tax return.

     Subsequently, respondent determined that petitioners failed

to report on their tax return for 2001 income from discharge of

indebtedness of $6,583.   Accordingly, respondent issued to

petitioners a notice of deficiency determining a deficiency of

$865 in petitioners’ 2001 Federal income tax.

                            Discussion

     As a general rule, the determinations of the Commissioner in

a notice of deficiency are presumed correct, and the taxpayer

bears the burden of proving the Commissioner’s determinations in

the notice of deficiency to be in error.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     As one exception to this

rule, section 7491(a) places upon the Commissioner the burden of

proof with respect to any factual issue relating to liability for

tax if the taxpayer maintained adequate records, satisfied the

substantiation requirements, cooperated with the Commissioner,
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and introduced during the Court proceeding credible evidence with

respect to the factual issue.   Although neither party alleges the

applicability of section 7491(a), we conclude that the burden of

proof has not shifted with respect to the issue in the present

case.

     Section 61(a) defines gross income as “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.”

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

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

(all realized accessions to wealth are presumed taxable income,

unless the taxpayer can demonstrate that an acquisition is

specifically exempted from taxation), revg. 79 T.C. 398 (1982).

     It is beyond dispute that “Income from discharge of

indebtedness” is included within the broad definition of income.

Sec. 61(a)(12); sec. 1.61-12(a), Income Tax Regs.   “The

underlying rationale for such inclusion is that to the extent a

taxpayer is released from indebtedness, he or she realizes an

accession to income due to 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., 284 U.S. 1, 3

(1931)).
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     A discharge of indebtedness generally produces income in an

amount equal to the difference between the amount due on the

obligation and the amount paid for the discharge.   If no

consideration is paid for the discharge, then the entire amount

of the debt is considered the amount that the debtor must include

in income.   Sec. 61(a)(12).

     There are both statutory and common law exceptions to the

rule requiring the recognition of income from the discharge of

indebtedness.   E.g., sec. 108(a); Zappo v. Commissioner, 81 T.C.

77, 85-86 (1983).   However, these exceptions do not apply to the

present case.

     Petitioners state that the instructions in the Internal

Revenue Service (IRS) guidance booklet for filing a 1099-C

require that only the principal of a lending transaction be taken

into income as discharge of indebtedness income.    Consequently,

petitioners argue that their outstanding credit card liability,

which included interest, operation charges, and penalties, should

be reduced pursuant to the instructions in the IRS guidance

booklet.   The instructions on which petitioners rely are found in

the “2001 Instructions for Forms 1099-A and 1099-C”.   The

pertinent instructions state, as follows:
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     Debt Defined

     A debt is any amount owed to you including stated principal,
     stated interest, fees, penalties, administrative costs, and
     fines. The amount of debt canceled may be all or only part
     of the total amount owed. However, for a lending
     transaction, you are required to report only the stated
     principal. See Exceptions on page AC-3.

                  *   *    *   *       *    *    *

     Exceptions

                  *   *    *   *       *    *    *

          2.    Interest. You are not required to report interest.
     However,   if you choose to report interest as part of the
     canceled   debt in box 2 [of the 1099-C], you must show the
     interest   separately in box 3.

          3. Nonprincipal amounts. For a lending transaction,
     you are not required to report any amount other than stated
     principal. A lending transaction occurs when a lender loans
     money to, or makes advances on behalf of, a borrower
     (including revolving credit and lines of credit).
     Nonprincipal amounts include penalties, fines, fees, and
     administrative costs. However, for a nonlending
     transaction, report any of these amounts that are included
     in the debt.

This guidance is provided by the IRS to assist parties in

preparing a Form 1099-C.

     First, the authoritative sources of Federal tax law are in

the statutes, regulations, and judicial decisions, and not in

informal publications provided by the IRS.      Zimmerman v.

Commissioner, 71 T.C. 367, 371 (1978), affd. without published

opinion 614 F.2d 1294 (2d Cir. 1979).      Second, petitioners have

not shown the total amount of interest, operation charges, and

penalties that they claim should reduce their outstanding credit
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card liability.   Third, pursuant to the above-referenced

instructions, in a nonlending transaction, such as occurred here,

any nonprincipal amounts are included in the debt.    Thus, it

appears that petitioners are incorrectly interpreting the above-

referenced instructions or are incorrectly categorizing their

transaction as a lending transaction.

     Further, applicable case law establishes that in situations

where the facts and circumstances are such that indebtedness from

a credit card account is being discharged, the amount of income

as a result of the discharge of this indebtedness is an amount

equal to the difference between the amount due on the obligation

and the amount paid for the discharge, or if no consideration is

paid for the discharge, then the entire amount of the debt is

considered the amount of income that the debtor must include in

income.   See Earnshaw v. Commissioner, T.C. Memo. 2002-191, affd.

150 Fed. Appx. 745 (10th Cir. 2005).    Accordingly, we conclude

that petitioners received discharge of indebtedness income of

$6,583.

     Petitioners alternatively argue that the amount of $6,583

was a reduction of charges agreed to by MBNA in exchange for

petitioners’ prompt payment of $14,937.26.    In other words,

petitioners argue that they contested the amount of the debt with

MBNA and that through negotiations it was established that

$14,937.26 was the total amount of petitioners’ credit card debt.
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Nothing in the record indicates that petitioners contested the

amount of the credit card debt with MBNA.     In fact, MBNA’s action

of issuing a Form 1099-C is contrary to petitioners’ contention.

Further, petitioners have not offered any documentary evidence

supporting their claims that they contested the amount of the

debt with MBNA and that through negotiations it was established

that $14,937.26 was the total amount of petitioners’ credit card

debt.   It is well settled that we are not required to accept

self-serving testimony in the absence of corroborating evidence.

Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989),

affg. T.C. Memo. 1987-295; Niedringhaus v. Commissioner, 99 T.C.

202, 212 (1992).   On the basis of the record in the present case,

we find that the amount of $6,583 was not a reduction of charges

but was, in fact, a discharge of indebtedness.

     We have considered all of the other arguments made by

petitioners, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                       Decision will be entered

                               for respondent.
