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On October 17, 2001, NCO sent petitioner a collection letter
indicating that the amount owed was $39,627, but that the amount
due on October 31, 2001, was $6,000. The letter further
indicated that “Your regularly scheduled payment * * * is now due
according to the terms you arranged with our office.” On October
31, 2001, petitioner paid NCO $6,000 with respect to his MBNA
account.
For 2001, NCO sent to petitioner a Form 1099-C, Cancellation
of Debt, reporting debt canceled on October 31, 2001, of $31,327.
On his Federal income tax return for 2001, petitioner did
not report the amount reported on the Form 1099-C.
Respondent determined that petitioner failed to report on
his tax return for 2001 income from the cancellation of
indebtedness of $31,327. Respondent further determined that
petitioner is liable for the accuracy-related penalty for
substantial understatement of income tax.
Discussion
A. Discharge of Indebtedness
Gross income includes all income from whatever source
derived, including but not limited to discharge of indebtedness.
Sec. 61(a)(12); sec. 1.61-12(a), Income Tax Regs. A discharge of
indebtedness generally produces income in an amount equal to the
difference between the amount due on the obligation and the
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