Schachner v. Comm'r

ARMEN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. ¹ The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.

Respondent determined a deficiency in petitioners' Federal income tax for 2003 in the amount of $ 1,950.

The sole issue for decision is whether petitioners should have included $ 7,807 of cancellation of indebtedness income on their 2003 Federal income tax return. We hold that they should have done so and therefore*190 sustain respondent's determination.

BACKGROUND

Some of the facts have been stipulated, and they are so found. We incorporate by reference the parties' stipulation of facts and accompanying exhibits.

At the time the petition was filed, Stephen Bernard Schachner (Mr. Schachner) and Jill Frances Schachner (jointly petitioners) lived in Charlotte, North Carolina.

In 1994, while Mr. Schachner was taking classes at a local community college, he borrowed $ 10,030 from University Support Services to purchase an Apple computer (the Apple loan). At Mr. Schachner's request, his mother-in-law applied for the loan on his behalf, and both Mr. Schachner and his mother-in-law signed the Application & Promissory Note, agreeing to be jointly and severally liable for the loan.

In 1995, petitioners filed a Chapter 13 bankruptcy petition with the United States Bankruptcy Court for the Western District of North Carolina. A discharge was granted on April 7, 2000. The Apple loan was not discharged as a part of the bankruptcy proceedings. ²

*191 In 2003, approximately $ 7,807 of the Apple loan debt remained unpaid, and the debt was canceled by EduCap, Inc. (EduCap), the successor to University Support Services and then-current holder of the loan. EduCap mailed Mr. Schachner a Form 1099-C, Cancellation of Debt, reporting the $ 7,807 discharge of indebtedness. ³ At trial, Mr. Schachner testified that he did not receive it.

Respondent's determination of a deficiency in petitioners' Federal income tax for the taxable year 2003 was solely attributable to petitioners' failure to report the cancellation of indebtedness*192 income.

DISCUSSION ⁴

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). Section 108(a)(1) lists several exclusions from this general rule, and petitioners argue that the exclusion in section 108(a)(1)(A) applies because the "loan was discharged in [their] Chapter 13 bankruptcy 4 years ago."

Section 108(a)(1)(A) provides that gross income does not include cancellation of indebtedness income if the discharge occurs in a title 11 case. Title 11 of the United States Code contains the provisions relating to bankruptcy, including the rules related to 11 U.S.C. Chapter 13, Adjustment of Debts of an Individual*193 with Regular Income. Yet the Apple loan was specifically not discharged -- nor was it dischargeable -- in the bankruptcy proceedings. The loan remained on EduCap's books until it was written off on April 30, 2003. Section 108(a)(1)(A) does not apply. ⁵

Petitioners also claim that they "are not the guarantor of the loan." At trial, Mr. Schachner attempted to argue that since he was not the "applicant", the debt was not his. However, the simple fact remains that Mr. Schachner signed the Application & Promissory Note, promising to be held jointly and severally liable for the debt. He received the proceeds of the loan directly. Further, the sole purpose in obtaining the loan was to enable him to purchase a computer and further*194 his education.⁶ Mr. Schachner's attempt to avoid responsibility and place the debt and its consequences solely with his mother-in-law is unavailing.

To the extent petitioners have made other arguments, the Court concludes such arguments are without merit.

As no exclusion applies and the debt was clearly Mr. Schachner's responsibility, petitioners should have included $ 7,807 of cancellation of indebtedness income in their gross income on their 2003 tax return.

CONCLUSION

Reviewed and adopted as the report of the Small Tax Case Division.

To reflect our disposition of the disputed issue,

Decision will be entered for respondent.