## Facts

- David Plotinsky filed a federal income tax return for 2004.
- In 2001, Plotinsky consolidated his student loans with Key Bank USA/American Education Services (AES) and enrolled in an incentive program.
- Under the program, a borrower who made 36 consecutive on-time monthly payments would receive a partial discharge of the remaining loan balance.
- In 2004, after Plotinsky satisfied the program requirements, AES discharged $3,043 of his loan principal and issued Form 1099-C reporting cancellation of debt.
- Plotinsky did not include the $3,043 in gross income; he attached a statement asserting the discharge was a “gift” excludable under I.R.C. § 102(a).
- The IRS issued a notice of deficiency treating the $3,043 as includible cancellation-of-indebtedness income under I.R.C. § 61(a).
- Plotinsky petitioned the U.S. Tax Court for redetermination.

## Issues

1. Whether $3,043 of student-loan principal discharged under a lender’s standardized on-time payment incentive program is includible in gross income as discharge-of-indebtedness income under I.R.C. § 61(a)(12).
2. Whether the discharge is excludable from gross income as a “gift” under I.R.C. § 102(a).

## Decision

- The Tax Court sustained the deficiency on the ground that the $3,043 was taxable cancellation-of-indebtedness income under I.R.C. § 61(a)(12).
- The court rejected Plotinsky’s claim that the discharge was a “gift” under I.R.C. § 102(a).
- Judgment was entered for the Commissioner on the inclusion of the discharged amount in income.

## Legal Principles

- Gross income under I.R.C. § 61(a) includes “income from discharge of indebtedness” unless a specific statutory exclusion applies.
- Whether a transfer is a “gift” excludable under I.R.C. § 102(a) depends primarily on the transferor’s intent; a gift requires “detached and disinterested generosity” rather than a business motive.
- Debt forgiveness provided by a commercial lender pursuant to a uniform incentive program tied to borrower performance (e.g., timely payments and consolidation) reflects a quid pro quo business arrangement, not donative intent.
- When a taxpayer relies only on the gift exclusion and no other cancellation-of-debt exclusion is established, the discharged amount remains includible in gross income.

## Conclusion

A lender’s partial discharge of student-loan principal earned through a standardized on-time payment incentive program constitutes taxable cancellation-of-indebtedness income under I.R.C. § 61(a)(12) and is not excludable as a gift under I.R.C. § 102(a) because the discharge is business-motivated and conditioned on the borrower’s performance.


Plotinsky v. Commissioner, T.C. Memo. 2008-244 (2008)