Plotinsky v. Comm'r , 96 T.C.M. 292 ( 2008 )

T.C. Memo. 2008-244
UNITED STATES TAX COURT
DAVID ISAAC PLOTINSKY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4094-07. Filed October 29, 2008.
David Isaac Plotinsky, pro se.
Kelly R. Morrison-Lee, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined a deficiency of $761
in petitioner’s Federal income tax (tax) for his taxable year
2004.
The issue for decision is whether petitioner is entitled for
his taxable year 2004 to exclude from gross income under section
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102(a)1 $3,043 of a certain loan of petitioner that the creditor
discharged. We hold that he is not.
FINDINGS OF FACT
All of the facts in this case, which the parties submitted
under Rule 122, have been stipulated by the parties and are so
found.
Petitioner resided in Washington, D.C., at the time he filed
the petition in this case.
During 1993 through 1997, petitioner financed a portion of
his college education through a Federal loan with United Student
Aid Funds, Inc. (petitioner’s college loan). During 1997 through
2000, petitioner financed a portion of his law school education
with several Federal loans with Access Group (petitioner’s law
school loans). (We shall refer collectively to petitioner’s
college loan and petitioner’s law school loans as petitioner’s
Federal student loans.)
As part of its business, Key Bank USA/American Education
Services (AES) offered to consolidate student loans like peti-
tioner’s Federal student loans. As an incentive designed to
induce individuals with student loans to consolidate those loans
with AES, AES offered an on-time payment incentive program (AES’s
incentive program). Pursuant to AES’s incentive program, if an
1
All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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individual were to consolidate the individual’s student loans by
taking out a loan from AES (AES loan) and the individual were to
make 36 consecutive on-time monthly payments on the AES loan, AES
would discharge a portion of that loan.
Petitioner was aware of AES’s incentive program when in
August 2001, after graduating from law school, he consolidated
petitioner’s Federal student loans through AES (petitioner’s
consolidated student loan). The promissory note and the repay-
ment schedule that petitioner signed and that evidenced peti-
tioner’s consolidated student loan did not address any incentive
program with respect to the repayment of that loan.
During 2004, the year at issue, petitioner’s employer, the
United States House of Representatives, made $6,288 of payments
on petitioner’s behalf on petitioner’s consolidated student loan.
During that year, petitioner did not make any additional payments
on that loan.
In 2004, pursuant to AES’s incentive program and as a result
of 36 consecutive on-time payments having been made on peti-
tioner’s consolidated student loan, AES discharged $3,043 of that
loan.
AES issued Form 1099-C, Cancellation of Debt (2004 Form
1099-C), to petitioner for his taxable year 2004. That form
showed $3,043.28 as the amount of debt canceled. The instruc-
tions to the 2004 Form 1099-C that AES sent to petitioner stated
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in pertinent part: “Generally, if you are an individual, you
must include the canceled amount on the ‘Other Income’ line of
Form 1040. * * * However, some canceled debts are not includible
in your income.”
Petitioner timely filed Form 1040, U.S. Individual Income
Tax Return, for his taxable year 2004 (petitioner’s 2004 return).
In that return, petitioner reported gross income of $76,917 that
did not include the $3,043.28 of petitioner’s consolidated
student loan that AES discharged.
Petitioner attached to petitioner’s 2004 return a document
(petitioner’s attachment to petitioner’s 2004 return) that stated
in pertinent part:
I received a Form 1099-C from AES Graduate &
Professional Loan Services (“AES”), which stated a
cancellation of debt in the amount of $3043.28. I am
not reporting this amount as income because it is my
reading of Internal Revenue Service Pub. 525, at 17-18,
that this cancellation constitutes a gift rather than
income.
AES is the lender with which I consolidated my law
school loans approximately three years ago. As an
incentive to select AES as my lender, AES offered a
reduction in the total amount of my loans, and it is
this offer that forms the entire basis for the debt
cancellation of $3043.28. The offer was contingent
upon my making 36 consecutive on-time monthly payments,
and now that this has been achieved the debt cancella-
tion is locked in.
On November 13, 2006, respondent issued a notice of defi-
ciency to petitioner for his taxable year 2004. In that notice,
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respondent determined to include in gross income the $3,0432 of
petitioner’s consolidated student loan that AES discharged.
OPINION
Petitioner bears the burden of proving that the determina-
tion in the notice is erroneous.3 See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). That this case was submit-
ted fully stipulated does not change that burden or the effect of
a failure of proof. See Rule 122(b); Borchers v. Commissioner,
95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir. 1991).
It is petitioner’s position that he is entitled for his
taxable year 2004 to exclude from gross income under section
102(a) $3,043 of petitioner’s consolidated student loan that AES
discharged in that year.
Section 61(a) defines the term “gross income” broadly to
mean all income from whatever source derived. Generally, income
from the discharge of indebtedness is includible in gross income.
Sec. 61(a)(12). There are, however, certain exceptions to that
general rule. One of those exceptions on which petitioner relies
is found in section 102(a). As pertinent here, section 102(a)
2
We presume that respondent rounded down to the nearest
dollar the $3,043.28 shown in the 2004 Form 1099-C. For conven-
ience, when referring to the amount of petitioner’s consolidated
student loan that AES discharged in 2004, we shall hereinafter
round that amount down to the nearest dollar.
3
Petitioner does not claim that the burden of proof shifts
to respondent under sec. 7491(a).
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excludes from gross income the value of property acquired by
gift. If the discharge of a loan constitutes a gift from the
creditor to the debtor, the debtor has no income as a result of
that discharge. See id.
In support of petitioner’s position under section 102(a),
petitioner relies on Helvering v. Am. Dental Co., 318 U.S. 322
(1943), and argues that, because AES received nothing from
petitioner in return for its discharge of $3,043 of petitioner’s
consolidated student loan, the amount discharged was a gift from
AES to him. According to petitioner,
The cancellation of a portion of Petitioner’s debt by
AES falls squarely under the Supreme Court’s definition
of a gift as “a release of something to the debtor for
nothing.” [Helvering v. Am. Dental Co., 318 U.S. 322,
331 (1943).] * * * regardless of the AES “on time
incentive” program, Petitioner was already under an
independent obligation under the terms of his loan
agreement with AES to make continual timely payments.
Because the “on time incentive” merely cancelled a
portion of Petitioner’s debt for doing something that
he was already contractually obligated to do anyway,
the cancellation of debt was “a release of something to
the debtor for nothing” and therefore can only be
construed as a gift. * * *
Petitioner’s reliance on Helvering v. Am. Dental Co., supra,
to support his position under section 102(a) is misplaced. In
contrast to the finding in that case that there was “a release of
something to the debtor [the taxpayer] for nothing,” id. at 331,
we find on the record before us that petitioner has failed to
carry his burden of establishing that AES’s discharge of $3,043
of petitioner’s consolidated student loan pursuant to AES’s
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incentive program was “a release of something to the debtor
[petitioner] for nothing”. Id. Indeed, we have found on that
record that AES offered AES’s incentive program in order to
induce individuals like petitioner to consolidate their student
loans with AES. We have also found on the record before us that
in 2004, pursuant to AES’s incentive program and as a result of
36 consecutive on-time payments having been made on petitioner’s
consolidated student loan, AES discharged $3,043 of that loan.
As petitioner acknowledged in petitioner’s attachment to peti-
tioner’s 2004 return: “As an incentive to select AES as my
lender, AES offered a reduction in the total amount of my loans,
and it is this offer that forms the entire basis for the debt
cancellation of $3043.28.” On the record before us, we find that
petitioner has failed to carry his burden of establishing that
AES received nothing from petitioner in return for its discharge
of $3,043 of petitioner’s consolidated student loan.
Even if we had found that AES received nothing in return for
its discharge of $3,043 of petitioner’s consolidated student
loan, petitioner’s reliance on Helvering v. Am. Dental Co.,
supra, nonetheless would be misplaced. In that case, the tax-
payer owed delinquent rent to his lessor and delinquent interest
to his creditors. Id. at 323-324. The taxpayer’s lessor dis-
charged a portion of that delinquent rent, and the taxpayer’s
creditors discharged all of that delinquent interest. Id. The
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taxpayer argued that the discharged rent and the discharged
interest constituted gifts under section 22(b)(3) of the Revenue
Act of 1936, a predecessor of section 102(a).4 Id. at 324. The
Supreme Court of the United States (Supreme Court) held that the
taxpayer’s discharged rent and discharged interest constituted
gifts under section 22(b)(3) of the Revenue Act of 1936. Id. at
331. In so holding, the Supreme Court explained that the “for-
giveness was gratuitous, a release of something to the debtor for
nothing, and sufficient to make the cancellation here gifts
within the statute [section 22(b)(3) of the Revenue Act of
1936].” Id.
However, in Commissioner v. Jacobson, 336 U.S. 28, 50-51
(1949), the Supreme Court clarified what it said in Helvering v.
Am. Dental Co., supra, and the meaning of the term “gift” in
section 22(b)(3) of the Revenue Act of 1938 and section 22(b)(3)
of the 1939 Code.5 In Jacobson, the taxpayer acquired a 99-year
4
Sec. 22(b)(3) of the Revenue Act of 1936, ch. 690, 49 Stat.
1657, was reenacted in the Revenue Act of 1938, ch. 289, sec.
22(b)(3), 52 Stat. 458, and was codified as sec. 22(b)(3) of the
Internal Revenue Code of 1939 (1939 Code), ch. 2, 53 Stat. 10.
The Revenue Act of 1942, ch. 619, sec. 111(a), 56 Stat. 809, made
changes not pertinent here to sec. 22(b)(3) of the 1939 Code.
Sec. 22(b)(3) of the 1939 Code, as amended by the Revenue Act of
1942, was reenacted with changes not pertinent here as sec.
102(a) of the Internal Revenue Code of 1954 (1954 Code), ch. 736,
68A Stat. 28. Sec. 102(a) of the 1954 Code was reenacted with no
changes as sec. 102(a) of the Internal Revenue Code of 1986. Tax
Reform Act of 1986, Pub. L. 99-514, sec. 2, 100 Stat. 2095.
5
See supra note 4.
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leasehold interest in certain property and the improvements on
that property. Id. at 32. Several years later the taxpayer
borrowed money from a bank. Id. As security for that loan, the
taxpayer executed 200 bonds secured by a trust deed on his
leasehold interest and the improvements thereon. Id. Certain
persons (bondholders) purchased those bonds. Id. at 33. There-
after, the value of the taxpayer’s leasehold interest and the
improvements thereon sharply declined, and the taxpayer, who was
solvent although in difficult financial circumstances, repur-
chased at less than face value his bonds from the bondholders.
Id. at 34-35. The issue presented in Jacobson was whether the
difference between the face value of each of the bonds over the
amount that the taxpayer paid to each bondholder was a gift to
the taxpayer by each bondholder under section 22(b)(3) of the
Revenue Act of 1938 for one of the years involved in Jacobson and
under section 22(b)(3) of the 1939 Code for the remaining two
years involved in Jacobson. Id. at 47-48. The Supreme Court
held that no gifts occurred under that section. Id. at 52. In
so holding, the Supreme Court reasoned that there was no gift
under section 22(b)(3) of the Revenue Act of 1938 and section
22(b)(3) of the 1939 Code unless the facts established that the
transferor intended to make a gift. Id. at 51. According to the
Supreme Court:
There was no suggestion in the evidence or the findings
that any bondholder was acting from any interest other
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than his own. Each transaction was a sale. The seller
sought to get as high a price as he could for the bond
and the buyer sought to pay as low a price as he could
for the same bond. If the transaction had been com-
pletely on the open market through a stock exchange,
the conduct and intent of each party could have been
the same and there would have been little, if any,
basis for any claim that the respondent’s gain was not
taxable income. The mere fact that the seller knew
that he was selling to the maker of the bond as his
only available market did not change the sale into a
gift. In the absence of proof to the contrary, the
intent of the seller may be assumed to have been to get
all he could for his entire claim. Although the sales
price was less than the face of the bond and less than
the original issuing price of the bond, there was
nothing to indicate that the seller was not getting all
that he could for all that he had. There is nothing in
the evidence or findings to indicate that he intended
to transfer or did transfer something for nothing.
* * * The seller did not first release the maker from a
part of the maker’s obligation and, having made the
maker a gift of that release, then sell him the balance
of the bond or vice versa. If the seller actually had
intended to give the maker some gift[,] the natural
reflection of that gift would have been a credit on the
face of the bond or at least some record or testimony
evidencing the release. * * * It is quite possible that
a bondholder might make a gift of an entire bond to
anyone, including the maker of it. The facts and
findings in this case do not establish any such intent
of the seller to make a gift in contradiction of the
natural implications arising from the sales and assign-
ments which he made. It is conceivable, although
hardly likely, that a bondholder, in the ordinary
course of business and without any express release of
his debtor, might have sold part of his claims on the
bonds he held at the full face value of those parts and
then have made a gift of the rest of his claims on
those bonds to the same debtor “for nothing.” It is
that kind of extraordinary transaction that the respon-
dent asks us, as a matter of law, to read into the
simple sales which actually took place and from which
he derived financial gains. We are unable to do so on
the findings before us. * * *
Id. at 50-51.
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In Commissioner v. Duberstein, 363 U.S. 278 (1960), the
Supreme Court further clarified the meaning of the term “gift” in
section 22(b)(3) of the 1939 Code.6 Duberstein involved two
consolidated cases. Id. at 279. In one of those cases, the
taxpayer, Mr. Duberstein, was president of a company that had
done business for a number of years with another company, Mohawk
Metal Corporation (Mohawk). Id. at 280. From time to time, the
president of Mohawk, Mr. Berman, asked Mr. Duberstein whether he
knew of potential customers for Mohawk’s products, and Mr.
Duberstein provided Mr. Berman with some names. Id. Thereafter,
Mr. Berman telephoned Mr. Duberstein and told him that the
information that Mr. Duberstein gave Mr. Berman regarding poten-
tial customers had been so helpful that he wanted to give Mr.
Duberstein a present. Id. Mr. Duberstein told Mr. Berman that
he owed him nothing. Id. Mr. Berman insisted that Mr.
Duberstein accept a Cadillac as a gift from Mohawk, and Mr.
Duberstein ultimately relented and accepted the Cadillac. Id. at
280-281. Mr. Duberstein excluded the Cadillac from his gross
income as a gift under section 22(b)(3) of the 1939 Code. Id. at
281. The Commissioner of Internal Revenue (Commissioner) deter-
mined that the value of the Cadillac was includible in Mr.
Duberstein’s gross income. Id. The Tax Court of the United
States, the predecessor of this Court, upheld that determination.
6
See supra note 4.
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Id. The United States Court of Appeals for the Sixth Circuit
(Court of Appeals for the Sixth Circuit) disagreed and reversed
the decision for the Commissioner of the Tax Court of the United
States. Id. The Supreme Court reversed the judgment of the
Court of Appeals for the Sixth Circuit. Id. at 293.
In the other case involved in Duberstein, the taxpayer, Mr.
Stanton, had been employed by Trinity Church (Trinity) for
approximately ten years when its board of directors (Trinity’s
board) terminated the treasurer of Trinity Operating Co. (trea-
surer), Trinity’s wholly owned subsidiary that managed its real
estate holdings. Id. at 281-282. At a special meeting of
Trinity’s board, Mr. Stanton asked Trinity’s board to reconsider
the treasurer’s termination. Id. at 282. The minutes from that
meeting reflected that “‘resentment was expressed as to the
“presumptuous” suggestion that the action of the Board, taken
after long deliberation, should be changed.’” Id. Trinity’s
board, however, did give the treasurer the opportunity to resign
rather than be discharged. Id. When the treasurer did not
resign, Trinity’s board terminated his employment. Id. In a
resolution, Trinity’s board agreed to pay the treasurer six
months’ salary. Id. at 282-283. Thereafter, Mr. Stanton submit-
ted his resignation “in order to avoid any such embarrassment or
question at any time as to his willingness to resign if the Board
desired”. Id. at 283. Trinity’s board did not accept his
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resignation. Id. Mr. Stanton again submitted his resignation
the following week, and Trinity’s board accepted it. Id. After
Mr. Stanton’s resignation, Trinity’s board passed a resolution
that stated in pertinent part: “‘in appreciation of the services
rendered by Mr. Stanton . . . a gratuity is hereby awarded to him
of Twenty Thousand Dollars, payable to him in equal installments
of Two Thousand Dollars at the end of each and every month’”.
Id. at 281-282. After Trinity’s board passed the resolution
regarding Mr. Stanton, a member of that board stated: “We were
all unanimous in wishing to make Mr. Stanton a gift.” Id. at
282. Mr. Stanton excluded the total amount of the payments from
his gross income as a gift under section 22(b)(3) of the 1939
Code. Id. at 283. The Commissioner determined that that total
amount was includible in Mr. Stanton’s gross income. Id. Mr.
Stanton paid the tax attributable to that determination and
commenced suit for a refund in the United States District Court
for the Eastern District of New York (District Court). Id. The
District Court held that the total amount of payments to Mr.
Stanton constituted a gift under section 22(b)(3) of the 1939
Code. Id. The United States Court of Appeals for the Second
Circuit (Court of Appeals for the Second Circuit) disagreed and
reversed the judgment of the District Court. Id. The Supreme
Court vacated the judgment of the Court of Appeals for the Second
Circuit and remanded the case to the District Court “for further
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proceedings not inconsistent with this opinion.” Id. at 293.
In considering the issue under section 22(b)(3) of the 1939
Code presented in each of the cases involved in Duberstein, the
Supreme Court set forth the principles under which each of those
issues was to be resolved. According to the Supreme Court:
the statute [section 22(b)(3) of the 1939 Code] does
not use the term “gift” in the common-law sense, but in
a more colloquial sense. This Court has indicated that
a voluntarily executed transfer of * * * property by
one to another, without any consideration or compensa-
tion therefor, though a common-law gift, is not neces-
sarily a “gift” within the meaning of the statute. For
the Court has shown that the mere absence of a legal or
moral obligation to make such a payment does not estab-
lish that it is a gift. Old Colony Trust Co. v. Com-
missioner, 279 U.S. 716, 730 [(1929)]. And, impor-
tantly, if the payment proceeds primarily from “the
constraining force of any moral or legal duty,” or from
“the incentive of anticipated benefit” of an economic
nature, Bogardus v. Commissioner, 302 U.S. 34, 41
[(1937)], it is not a gift. * * * A gift in the statu-
tory sense, on the other hand, proceeds from a ”de-
tached and disinterested generosity,” Commissioner v.
LoBue, 351 U.S. 243, 246 [(1956)]; “out of affection,
respect, admiration, charity, or like impulses.”
Robertson v. United States, * * * [343 U.S. 711, 714
(1952)]. And in this regard, the most critical consid-
eration * * * is the transferor’s “intention.”
Bogardus v. Commissioner, 302 U.S. 34, 43 [(1937)].
“What controls is the intention with which payment,
however voluntary, has been made.” Id., at 45 (dis-
senting opinion).
The Government says that this “intention” of the
transferor cannot mean what the cases on the common-law
concept of gift call “donative intent.” With that we
are in agreement, for our decisions fully support this.
Moreover, the Bogardus case itself makes it plain that
the donor’s characterization of his action is not
determinative--that there must be an objective inquiry
as to whether what is called a gift amounts to it in
reality. * * * [Fn. refs. omitted.]
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Id. at 285-286.
In the case involving Mr. Duberstein, the Supreme Court
applied the above-quoted principles and concluded:
we are in agreement, on the evidence we have set forth,
that it cannot be said that the conclusion of the Tax
Court was “clearly erroneous.” It seems to us plain
that as trier of the facts it was warranted in conclud-
ing that despite the characterization of the transfer
of the Cadillac by the parties and the absence of any
obligation, even of a moral nature, to make it, it was
at bottom a recompense for Duberstein’s past services,
or an inducement for him to be of further service in
the future. We cannot say with the Court of Appeals
that such a conclusion was “mere suspicion” on the Tax
Court’s part. * * *
Id. at 291-292.
In the case involving Mr. Stanton, the Supreme Court applied
the above-quoted principles and concluded:
it is critical here that the District Court as trier of
fact made only the simple and unelaborated finding that
the transfer in question was a “gift.” To be sure,
conciseness is to be strived for, and prolixity
avoided, in findings; but, * * * there comes a point
where findings become so sparse and conclusory as to
give no revelation of what the District Court’s concept
of the determining facts and legal standard may be.
* * * Such conclusory, general findings do not consti-
tute compliance with Rule 52’s[7] direction to “find the
facts specially and state separately . . . conclusions
of law thereon.” While the standard of law in this
area is not a complex one, we * * * think the
unelaborated finding of ultimate fact here cannot stand
as a fulfillment of these requirements. It affords the
reviewing court not the semblance of an indication of
the legal standard with which the trier of fact has
7
In referring to “Rule 52”, the Supreme Court was referring
to Fed. R. Civ. P. 52(a) in effect when the District Court
entered its judgment. That rule was amended with changes not
pertinent here. See Fed. R. Civ. P. 52(a).
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approached his task. For all that appears, the Dis-
trict Court may have viewed the form of the resolution
or the simple absence of legal consideration as conclu-
sive. While the judgment of the Court of Appeals
cannot stand, * * * [we] think there must be further
proceedings in the District Court looking toward new
and adequate findings of fact. * * * [Fn. ref. omit-
ted.]
Id. at 292-293.
In relying solely on Helvering v. Am. Dental Co., 318 U.S.
322 (1943), to support his position that AES’s discharge of
$3,043 of petitioner’s consolidated student loan constituted a
gift under section 102(a), petitioner fails to acknowledge that
the Supreme Court in Commissioner v. Jacobson, 336 U.S. at 50-51,
and Commissioner v. Duberstein, 363 U.S. at 292-293, requires us
to consider AES’s intention in discharging $3,043 of petitioner’s
consolidated student loan. We shall do so now.
We have found that AES offered AES’s incentive program in
order to induce individuals like petitioner to consolidate their
student loans with AES. We have also found that in 2004, pursu-
ant to AES’s incentive program, AES discharged $3,043 of peti-
tioner’s consolidated student loan because 36 consecutive on-time
payments had been made on that loan. On the record before us, we
find that AES did not intend to discharge $3,043 of petitioner’s
consolidated student loan out of “detached and disinterested
generosity”, Commissioner v. LoBue, 351 U.S. 243, 246 (1956), or
“out of affection, respect, admiration, charity or like im-
pulses”, Robertson v. United States, 343 U.S. 711, 714 (1952).
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See Commissioner v. Duberstein, supra at 285. On that record, we
further find that petitioner has failed to carry his burden of
establishing that, in discharging $3,043 of petitioner’s consoli-
dated student loan, AES intended to make a gift to him.8
Based upon our examination of the entire record before us,
we find that the $3,043 of petitioner’s consolidated student loan
that AES discharged is not excludable for his taxable year 2004
from his gross income under section 102(a). On that record, we
further find that petitioner must include for that year that
amount in his gross income.9
We have considered all of the parties’ respective conten-
tions and arguments that are not discussed herein, and we find
them to be without merit, irrelevant, and/or moot.
8
In making our findings regarding AES’s intention in dis-
charging $3,043 of petitioner’s consolidated student loan, we
have not relied merely on the 2004 Form 1099-C that AES issued to
petitioner and that showed $3,043 as the amount of debt canceled.
We have relied upon the entire record before us in making those
findings.
9
On brief, petitioner further argues that, even if we were
to find that the $3,043 of petitioner’s consolidated student loan
that AES discharged is includible in his gross income, he should
recognize that income over the remaining life of petitioner’s
consolidated student loan. We reject that argument. Income from
the discharge of indebtedness is income for the year in which the
indebtedness is discharged. Sec. 61(a)(12); see Jelle v. Commis-
sioner, 116 T.C. 63 (2001).
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To reflect the foregoing,
Decision will be entered
for respondent.