                  T.C. Summary Opinion 2006-119



                     UNITED STATES TAX COURT



                TIMOTHY C. ROBBINS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5187-04S.              Filed July 26, 2006.



     Timothy C. Robbins, pro se.

     Robert S. Scarbrough, for respondent.




     COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.




     1
      Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year at issue.
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     Respondent determined a deficiency of $1,760 in petitioner’s

Federal income tax for the year 2001.    The sole issue for

decision is whether petitioner realized discharge of indebtedness

income under section 61(a)(12) and, if so, the extent thereof

under section 108(a).

     Some of the facts were stipulated.    Those facts, with the

annexed exhibits, are so found and are made part hereof.

Petitioner’s legal residence at the time the petition was filed

was Everett, Washington.

     Petitioner is a civil litigation attorney in the State of

Washington.   From 1985 until 1995, he was a solo practitioner.

In 1995, petitioner hired a recent law graduate, Julie Herber, as

an associate and ultimately divided the practice with her.

During 2001, Ms. Herber owned one-half of the building where

petitioner’s practice is conducted and one-half of his principal

residence.    Ms. Herber, along with two other people, also shared

ownership of a cabin with petitioner.    Petitioner and Ms. Herber

were married sometime after 2002.

     Until 2001, petitioner had a credit card account with MBNA

America Bank N.A. (MBNA).   Sometime during 2001 petitioner

defaulted on his credit card payments and allowed the outstanding

balance to exceed his credit limit.     As of November 2, 2001, the

unpaid balance on petitioner’s MBNA credit card was $18,240.

Petitioner did not contact MBNA to dispute the amount owing.
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Instead, petitioner negotiated a settlement with MBNA for payment

of the balance.    MBNA agreed to accept a payment of $11,856 as

full accord and satisfaction for the $18,240 balance.     Petitioner

remitted the $11,856 to MBNA on November 29, 2001.

     MBNA thereafter issued petitioner a Form 1099-C,

Cancellation of Debt, for the $6,384 difference between what

petitioner owed on his card and the amount he paid pursuant to

the agreement.    Petitioner filed his 2001 Federal income tax

return timely, reporting gross income of $40,431 from wages and

rental income, but he did not include as gross income the $6,384

forgiven by MBNA and reflected on the Form 1099-C.

     In the notice of deficiency, respondent determined that the

$6,384 forgiven by MBNA constituted gross income.    The principal

issue is whether petitioner is absolved from liability for tax on

this forgiveness of indebtedness because of his claim that he was

insolvent at the time the indebtedness was forgiven.

     Gross income includes all income from whatever source

derived.   Sec. 61(a).   Discharge of indebtedness is specifically

included as an item of 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.

United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); Friedman

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

Memo. 1998-196.    The rationale of this principle is that the
                                - 4 -

discharge of a debt effects 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., supra).

     The treatment of discharge of indebtedness income parallels

the Internal Revenue Code’s treatment of loans.    Toberman v.

Commissioner, 294 F.3d 985, 988 (8th Cir. 2002), affg. in part

and revg. in part T.C. Memo. 2000-221.   Borrowed funds are not

included in a taxpayer’s income.   Nor are repayments of a loan

deductible from income.    When, however, an obligation to repay a

loan is settled for less than the amount of the loan, one

ordinarily realizes income from discharge of indebtedness.     Sec.

61(a)(12); 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).   The difference between the face value of the debt and

the amount paid in satisfaction of the debt is includable in the

taxpayer’s gross income.    Babin v. Commissioner, 23 F.3d 1032,

1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.

     Petitioner does not challenge the principle that discharge

of indebtedness constitutes gross income.   His sole argument is

that he was insolvent at the time he was relieved of this

liability, and, therefore, the discharged indebtedness does not

constitute gross income.   Under section 108(a)(1)(B), gross

income does not include any amounts that would be includable in
                                - 5 -

gross income by reason of the discharge of the indebtedness of

the taxpayer, provided that the taxpayer was insolvent at the

time the indebtedness was discharged.

     Petitioner testified extensively about his debts and offered

into evidence a collection statement listing his assets and

liabilities.   The Court, however, concludes that petitioner’s

testimony lacks credibility.    Petitioner produced no

documentation to support his claims reflected on the collection

statement offered at trial.

     Petitioner claimed, both in his collection statement and at

trial, that he was jointly and severally liable for the mortgage

on his business and two residences; however, petitioner owned

these properties jointly with other parties.    Although petitioner

may have been jointly and severally liable with other parties for

the indebtedness on these properties, that fact, standing alone

as relates to the issue in this case, does not establish that

petitioner was insolvent without proof that the other codebtors

were themselves insolvent.    The Court, therefore, rejects

petitioner’s argument.   His financial statement, without

additional corroboration as regards the solvency of his

codebtors, does not satisfy or establish to the Court that he is

insolvent.

     Petitioner reported $40,431 in gross income for the year at

issue.   Furthermore, petitioner testified that his firm earned
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$144,000 in 2000 and about the same in 2001.     He had at least a

50-percent interest in his principal residence and the building

where his firm was located.   Additionally, he had at least a 25-

percent interest in a cabin during 2001.     Although petitioner had

credit card debt in addition to the balance with MBNA, the

evidence presented does not satisfy the Court that these other

liabilities exceeded the value of his assets.     On this record,

the Court holds that petitioner was not insolvent during 2001

and, therefore, must include as gross income the $6,384 discharge

of indebtedness reported by MBNA.   Respondent, therefore, is

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                           Decision will be entered

                                       for respondent.
