                  T.C. Summary Opinion 2002-149



                     UNITED STATES TAX COURT



       GREGORY PAUL AND DENISE M. VIOLETTE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12697-00S.            Filed November 21, 2002.


     Gregory Paul and Denise M. Violette, pro sese.

     Carina J. Campobasso and Maureen T. O'Brien, for respondent.



     DEAN, 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and Rule references

are to the Tax Court Rules of Practice and Procedure.   The

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

this opinion should not be cited as authority.
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     Respondent determined a deficiency in petitioners' Federal

income tax for 1998 of $3,859.    The issue for decision is whether

petitioners had discharge of indebtedness income in 1998.1

                            Background

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.    At the time the petition was

filed, petitioners resided in Windsor, Maine.

     Prior to 1996, Mr. Violette (petitioner) obtained an

insurance policy from Minnesota Life Insurance Company (MLIC)

which provided for payments on his loans if a disability rendered

him unable to pay.   Petitioner began receiving benefits pursuant

to his MLIC policy on June 4, 1996.      Between June 4, 1996, and

April 14, 1998, MLIC made payments on petitioner's loans totaling

$24,421.

     Some time in 1998, MLIC determined that petitioner was not

entitled to the insurance benefits he had received.      It also

determined that attempts at collection would be futile.      For

1998, MLIC issued in petitioner’s name a Form 1099-MISC,

Miscellaneous Income, reporting nonemployee compensation of


     1
       In the notice of deficiency respondent also determined
that petitioners had unreported interest income, dividend income,
Social Security income, and an early withdrawal penalty. Because
petitioners have not questioned these determinations they are
deemed to have conceded their correctness. See Rule 34(b)(4);
Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988); Zimmerman v.
Commissioner, 67 T.C. 94, 104 n.7 (1976).
                                - 3 -

$22,905.2    Petitioner concedes that MLIC made the payments on his

loans.   Petitioners did not report the amount on their Federal

income tax return for 1998.    Petitioner was prosecuted for, and

pleaded guilty to, 20 counts of defrauding credit unions and

insurance companies, including MLIC.

                              Discussion3

     Respondent argues that the Form 1099-MISC from MLIC reports

an amount that represents a discharge of petitioner's

indebtedness.    Petitioner argues that he did not receive the Form

1099-MISC, and therefore any income it reports is not includable

in income.

     Section 61 defines gross income as "all income from whatever

source derived".    Section 61(a)(12) provides that gross income

specifically includes amounts received from a discharge of

indebtedness (DOI).    A taxpayer may realize DOI income by paying

an obligation at less than its face value.        United States v.

Kirby Lumber Co., 284 U.S. 1 (1931).        The underlying rationale of

this principle is that a reduction in debt without a


     2
       The Court notes that the amount identified on the Form
1099-MISC and in the notice of deficiency is less than the amount
of MLIC’s payments. The Court proceeds based on the amount
identified on the Form 1099 and determined by respondent.
     3
      Petitioners have made no argument that the burden of proof
shifting provisions of sec. 7491(a)(1), effective for Court
proceedings arising in connection with examinations commencing
after July 22, 1998, have application to this case, nor have they
offered any evidence that they have complied with the
requirements of sec. 7491(a)(2).
                                  - 4 -

corresponding reduction in assets causes an economic gain and

income to the debtor because the assets are no longer encumbered.

A DOI 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 of income which the debtor must include in income.

Sec. 61(a)(12).

     Under certain circumstances, a taxpayer may exclude DOI

income from gross income if the discharge occurs when the

taxpayer is insolvent.   Sec. 108(a)(1)(B).       The exclusion cannot

exceed the amount by which the taxpayer is insolvent.        Sec.

108(a)(3).   For purposes of this section, "insolvent" is defined

as "the excess of liabilities over the fair market value of

assets."   Sec. 108(d)(3).     Such a determination is to be made on

the basis of the taxpayer's assets and liabilities immediately

before the discharge.    Id.    The exclusions provided in section

108 do not apply in this case because the evidence does not

establish that petitioners were insolvent.

     Petitioner claims he did not realize DOI income because he

never received the Form 1099-MISC.        The Court disagrees.   "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
                               - 5 -

1099-MISC does not convert income into nontaxable income.

Rinehart v. Commissioner, T.C. Memo. 2002-71 (citing Vaughan v.

Commissioner, T.C. Memo. 1992-317, affd. without published

opinion 15 F.3d 1095 (9th Cir. 1993)).     MLIC’s issuance and

filing of the Form 1099-MISC with respect to petitioner's

benefits is evidence of its intention to cancel his debt.

Petitioner has not presented any evidence to indicate that the

Form 1099 did not represent DOI income.

     MLIC prepared a Form 1099-MISC reporting that it canceled

petitioner's indebtedness and $22,905 as the amount of debt

canceled.   Petitioner presented MLIC records indicating, among

other items, the date and amount of each payment to or for

petitioner's benefit that contributed to the amount of

indebtedness discharged in 1998.   Accordingly, the Court holds

that petitioner realized and failed to report discharge of

indebtedness income in 1998.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                       Decision will be entered

                               for respondent.
