- 3 -
Instead, petitioner negotiated a settlement with MBNA for payment
of the balance. MBNA agreed to accept a payment of $11,856 as
full accord and satisfaction for the $18,240 balance. Petitioner
remitted the $11,856 to MBNA on November 29, 2001.
MBNA thereafter issued petitioner a Form 1099-C,
Cancellation of Debt, for the $6,384 difference between what
petitioner owed on his card and the amount he paid pursuant to
the agreement. Petitioner filed his 2001 Federal income tax
return timely, reporting gross income of $40,431 from wages and
rental income, but he did not include as gross income the $6,384
forgiven by MBNA and reflected on the Form 1099-C.
In the notice of deficiency, respondent determined that the
$6,384 forgiven by MBNA constituted gross income. The principal
issue is whether petitioner is absolved from liability for tax on
this forgiveness of indebtedness because of his claim that he was
insolvent at the time the indebtedness was forgiven.
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.
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 that the
Page: Previous 1 2 3 4 5 6 7 Next
Last modified: May 25, 2011