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Respondent determined a deficiency of $4,538 and an addition
to tax under section 6651(a)(1) of $680 for 1996. Petitioners
concede that they should have included an additional $4 of
interest income in their gross income and that they are liable
for the failure to file addition to tax under section 6651(a)(1).
This Court must decide whether $13,938 of discharge of
indebtedness income is includable in petitioners' 1996 gross
income.
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in Ft. Myers, Florida, at the time
they filed their petition.
In 1996, the job of petitioner Edward Johns (petitioner) was
terminated. Petitioner knew he and his wife were overextended on
credit card debt and that they would be faced with financial
problems. Petitioners were headed for bankruptcy. Some of the
creditors offered petitioners a settlement for less than the full
amount of debt due. Petitioners paid a portion of the debts to
these creditors and in return the remainder of the debts were
discharged. Petitioners withdrew $17,511 from their retirement
account, and paid the early withdrawal penalty on this amount, in
order to use part of the amount to satisfy their debts.
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