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Respondent determined a $6,860 deficiency in petitioners’
Federal income tax and a $1,372 accuracy-related penalty under
section 6662(a) for 2003. The primary issue for decision is
whether petitioners were insolvent within the meaning of section
108(a)(1)(B) when the $39,274.90 second mortgage on their home
was canceled following the sale of the home in 2003 caused by the
default on the first mortgage.2
Background
Some of the facts were stipulated and are so found. The
stipulation of facts and the accompanying exhibits are
incorporated herein by this reference. Petitioners resided in
Layton, Utah, when they filed the petition in this case.
Mrs. Gale is a homemaker and earns no income. Mr. Gale is
employed by the Bureau of Land Management.
In 2003, Mr. Gale had back surgery and was out of work for
several weeks. He did not receive a pay check for some weeks.
Consequently, petitioners were unable to make the payments on two
loans secured by mortgages on their home, a first mortgage held
by First National Mortgage (First National) and a second mortgage
held by Citibank. First National notified petitioners that it
2In the notice of deficiency, respondent also made
adjustments to deductions for medical and dental expenses
petitioners reported on Schedule A, Itemized Deductions, that are
computed on the basis of the increase in petitioners’ adjusted
gross income.
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