## Facts

- The IRS issued a notice of deficiency for 2011; after concessions, the remaining dispute concerned cancellation-of-debt (COD) income and the insolvency exclusion.
- In 2008, the taxpayer opened a Bank of America checking account, deposited funds including an $8,500 check drawn on another bank, and withdrew $8,000 in cash.
- The $8,500 check did not clear, leaving the Bank of America account overdrawn; the taxpayer did not repay the overdraft, and the bank closed the account in 2008.
- In December 2011, Bank of America issued a Form 1099-C reporting $7,875 of canceled debt for 2011.
- The taxpayer did not include the $7,875 on his 2011 return.
- Around the time of the claimed discharge, the taxpayer had assets including a car (about $35,000), watches (about $500 total), and personal property of marginal value, and liabilities including a car loan (about $35,000) and student loans (about $15,000), among other obligations.

## Issues

1. Whether the taxpayer realized $7,875 of COD income in 2011 attributable to the bank overdraft.
2. If COD income was realized in 2011, whether it was excludable in whole or in part because the taxpayer was insolvent immediately before the discharge under I.R.C. § 108(a)(1)(B).

## Decision

- The court held the taxpayer realized $7,875 of COD income in 2011.
- The court held the taxpayer was insolvent immediately before the discharge and could exclude COD income under I.R.C. § 108(a)(1)(B) up to the amount of insolvency.
- The deficiency was recomputed to reflect the court’s insolvency finding and the parties’ concessions.

## Legal Principles

- COD is generally includible in gross income under I.R.C. § 61(a)(12) in the taxable year the discharge occurs.
- A creditor’s internal accounting treatment or issuance of a Form 1099-C is evidence but not, by itself, conclusive proof of the year of discharge.
- Information-reporting rules under Treas. Reg. § 1.6050P-1 may be used as evidence of discharge timing; a 36-month period of nonpayment can create a rebuttable presumption that a discharge occurred in the year the period ends.
- Under I.R.C. § 108(a)(1)(B) and § 108(d)(3), COD income is excluded to the extent the taxpayer is insolvent immediately before the discharge, measured by liabilities exceeding the fair market value of assets.

## Conclusion

The Tax Court treated the bank’s nonpayment history and reporting rules as sufficient to place the overdraft’s discharge in 2011, producing COD income, but allowed an exclusion for the portion of that income equal to the taxpayer’s proven insolvency immediately before the discharge.


Newman v. Commissioner, T.C. Memo. 2016-125 (T.C. 2016)