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moneys from the illegal activity, petitioner was held civilly
liable for $67,820 in what was described by counsel at trial as a
“disgorgement”.3 No portion of the $67,820 has ever been paid,
and, during the year at issue, the SEC formally relieved
petitioner from the obligation of paying this indebtedness. The
SEC issued to petitioner, for the year at issue, 2001, a Form
1099-C, Cancellation of Debt, in the amount of $67,820.45 for
what was described as “Default on payment of penalty,
disgorgement and interest”.
Petitioner filed a Federal income tax return for 2001, which
was received by the Internal Revenue Service on August 22, 2002.
On that return, the only income item reported was a loss of
$3,128 from a Schedule C, Profit or Loss From Business.
Petitioner did not include as income the forgiveness of the
$67,820 debt owing to the SEC.
In the notice of deficiency, respondent determined that the
$67,820.45 debt forgiveness by the SEC constituted gross income.
The principal issue considered at trial is whether petitioner is
absolved from liability for income tax on this forgiveness of
indebtedness because she was insolvent at the time the
indebtedness was forgiven.
Gross income includes all income from whatever source
3The word “disgorgement” is defined generally as giving up
illicit gains.
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Last modified: May 25, 2011