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On petitioners’ 2004 Form 1040, U.S. Individual Income Tax
Return, filed jointly in April 2005, petitioners did not report
any discharge of indebtedness income. Instead, petitioners
attached a statement to their return which disclosed that they
received a Form 1099-C from MBNA that reported discharge of
indebtedness income of $16,678. The statement also explained
that petitioners believed the amount disclosed on the Form 1099-C
was not subject to income tax.
Respondent’s determination of a deficiency in petitioners’
Federal income tax for the taxable year 2004 was attributable to
petitioners’ failure to report the discharge of indebtedness
income.3
OPINION
Section 61 generally defines gross income as “all income
from whatever source derived”. Section 61(a)(12) specifically
provides that gross income includes income from the discharge of
indebtedness. See also Gitlitz v. Commissioner, 531 U.S. 206,
213 (2001); United States v. Kirby Lumber Co., 284 U.S. 1 (1931).
Respondent determined that MBNA’s agreement with Mr. Payne to
accept $4,592 in full settlement of the undisputed account
3 The deficiency is also based on a greater portion of
petitioners’ Social Security income becoming taxable and the
disqualification of petitioners for the earned income credit.
Both of these adjustments stem from the increased gross income
petitioners would have as a result of the discharge of
indebtedness.
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Last modified: March 27, 2008