RTFI - Read The Instructions

Brian J. Talaske v. Commissioner, TC Summary Opinion 2011-33

I really don't like the outcome of this case.  The basic story is one that I have seen before. A creditor writes off somebody's debt.  Time passes.  Someone who works for the creditor senses anomalies in the space time continuum.  What is the problem ?  The creditor has taken a deduction without someone picking up income.  That big balance sheet in the sky is out of balance.  Crap.  We forgot to send out the 1099-C.  Let's send it out now.  They don't know where the dead beat is or in one case even have his correct name, but they've got a social security number and they have the address of the IRS so out it goes.

That's pretty much the story with Mr. Talaske, except unlike Dennis Gaffney a/k/a Thomas Gaffney, they seem to have gotten his name correct:

In March 2002, petitioner obtained a First USA VISA (First USA) credit card. Petitioner transferred to this new account balances from credit cards issued by other financial institutions.


In September 2002, petitioner defaulted on his First USA account.


As of March 31, 2003, petitioner's outstanding balance on his First USA account was $23,119.99, consisting of principal of $20,291.22 and finance charges of $2,828.77. On that date, First USA “charged off” principal of $20,291.22 and finance charges of $2,828.77, thereby resulting in a “new balance” of zero.


In or about 2004, First USA was acquired by JPMorgan Chase (Chase). For tax year 2005, Chase issued to petitioner a Form 1099-C, Cancellation of Debt, showing cancellation of indebtedness on December 31, 2005, of $20,291.22. The account number listed on the form matches the number of petitioner's credit card account with First USA.


Petitioner does not recall receiving any Form 1099-C from Chase in 2006, and his Form 1040, U.S. Individual Income Tax Return, for tax year 2005, which was prepared and timely filed in 2006, did not report any income from cancellation of indebtedness.

My first managing partner, who was running a firm founded by his father, who also ran a finance company, had many wise sayings that had been handed down by his father.  One of them was :

You'll never get out of debt by borrowing.

I have to congratulate Mr. Talaske on finding a loophole to that principle.  If you borrow from somebody who writes it off, you will get out of debt.  I doubt that JP Morgan Chase bought First USA because First USA had such a brilliant business model.  Give somebody money to pay off his credit card bills.  Wait one year.  Write off.  Regardless, apparently JP Morgan Chase was a little more compulsive about compliance or something.

When this happened to Mr. Gaffney, he took the matter to tax court and the court determined that whenever it was that the discharge occurred, it wasn't the year of the 1099-C.  Mr.  Gaffney apparently was a little more on the ball though.  Here is what happened with Mr. Talaski:

The March 24, 2008 notice of deficiency was mailed to petitioner at his last known address and was received by him no later than March 30, 2008. Notwithstanding the language in the notice of deficiency about filing a petition with the Tax Court "[i]f you want to contest this determination in court before making any payment,” petitioner did not do so. Rather, by letter dated March 30, 2008, petitioner wrote to respondent's Holtsville, New York service center, the office that had issued the deficiency notice, stating (inter alia) that “I continue to object” and “I will petition the tax court as required if the IRS fails to recognize the errors of the IRS claims”.


He didn't read the instructions, so he didn't get a chance to contest the deficiency in tax court.  So what is he doing in tax court now ?
Petitioner having failed to file a petition for redetermination, respondent assessed the determined deficiency, together with statutory interest, on August 11, 2008, see secs. 6213(c), 6601(a), and made notice and demand for payment pursuant to section 6303(a). Petitioner did not satisfy the outstanding liability.


On December 1, 2008, respondent sent petitioner a Final Notice of Intent To Levy And Notice Of Your Right To A Hearing in respect of the outstanding liability. Petitioner responded by filing a Form 12153, Request for a Collection Due Process or Equivalent Hearing.


What many people do not realize is that there are two distinct sets of processes involved in the tax system.  One has to do with the determination of what the correct tax is.  The other is about how, when and how much of, if any, that correct amount will be paid.  It sometimes seems that there are two types of people and two types of practitioners.  One group thinks that when the first process is complete, the taxpayer just writes a check.  The other group doesn't really pay much attention to the first process, since the "correct tax" is merely of academic interest. 

Mr. Talaske, being pro se, understandably given his overall circumstances and the relatively small stakes, apparently didn't understand the system.  He blew his chance to argue about what the correct tax was.  Although you "doubt as to liability" is one of the boxes that you can check on Form 12153, those guys really don't want to hear about it.

The Tax Court noted that Mr. Talaske might have a decent argument:

Finally, petitioner argues that regardless of when his credit card debt with First USA may have been canceled, he was insolvent at the time, which, in petitioner's view, justifies his failure to report the $20,291.22 amount on any return. In this regard, the record does strongly hint of petitioner's financial frailty;

Unfortunately they don't think they can help him:

 however, petitioner's insolvency at any particular point in time was never proven. otherwise have an opportunity to dispute such tax liability. Sec. 6330(c)(2)(B). Stated otherwise, a taxpayer may not challenge the underlying liability in an administrative hearing, and therefore this Court may not review that liability in a subsequent collection review proceeding such as the instant one, if the taxpayer received a notice of deficiency or otherwise had a prior opportunity to dispute the underlying liability

It seems to me that there should almost be a presumption of insolvency, when people have cancellation of indebtedness income.  Why else is the debt being discharged ?  I'm not sure how sorry I feel for Mr. Talaske, but the decision is overall very unsatisfying.