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rewards offset the $6,831.38 income at issue. However, there is
no evidence that any compromise or settlement agreement was
entered into between petitioner and the collection agency
representing American Express. The agreement simply was that
petitioner would pay $15,000 in cash, and the remaining $6,831.38
would be forgiven.2
Gross income includes all income from whatever source
derived. Sec. 61(a). Discharge of indebtedness is specifically
included as an item of gross income. Sec. 61(a)(12). This means
that a taxpayer who has incurred a financial obligation that is
later discharged or released has realized an accession to income.
Id.; United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931);
Friedman v. Commissioner, 216 F.3d 537, 545 (6th Cir. 2000),
affg. T.C. Memo. 1998-196. The rationale of this principle is
2Where the nature and amount of an indebtedness are
contested in a good faith dispute, and a compromise settlement is
reached, the excess of the stated principal amount of the claimed
debt over the amount for which the liability is settled does not
constitute discharge of indebtedness income. Preslar v.
Commissioner, T.C. Memo. 1996-543, revd. 167 F.3d 1323 (10th Cir.
1999) (citing United States v. Hall, 307 F.2d 238 (10th Cir.
1962)). There is no evidence that the $15,000 payment by
petitioner was a “settlement” or a compromise of the
indebtedness. Petitioner presented no evidence to show that the
delinquency charges were invalid. Moreover, it appears that,
from the terms of the American Express monthly statements,
petitioner’s membership rewards points also had no value because
the points were good only so long as the account was in good
standing. Since petitioner was in default on his account, he was
not in good standing, and there is no evidence he reinstated the
points by payment of a service fee as provided in the statement.
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Last modified: May 25, 2011