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.

Blast From The Past

Tax court summary opinions frequently feature taxpayers bringing fairly lame arguments forward.  Like the couple who managed to log 90,000 miles, because whenever they were out and about they were in business.  We should expect higher standards from the IRS.  So it is a little disturbing to witness the IRS being lame.  On the other hand, taxpayer victories in the tax court help us continue to have faith in the system.

Dennis W. Gaffney v. Com (TC Summary Opinion 2010-128) concerns cancellation of indebtedness income.  Accountants understand cancellation of indebtedness income, because they think in double entry.  Some of them think there is a big balance sheet in the sky.  If somebody writes something off without somebody picking up income the fabric of space time will become disturbed.  They can be extremely disturbed by asymmetrical results.  Personally I put taxing debt discharge income in the same category as the GAAP going concern qualification.  It's kicking somebody when they are down.

The exact year that you recognize income is always an important issue, since your tax is an annual computation.  It is particularly significant with COI income though, since COI income is excludable to the extent that you are insolvent.  One has to wonder why anybody would be cancelling your indebtedness for you when you are not insolvent.  The Gaffney case is all about timing.

The Gaffneys had lived in Hawaii, but because of some business disputes they found that they had to abandon their residence and in 1993 they moved to Carefree, Arizona.  Apparently there is something magical in that towns name.  In 1994 the Bank of America foreclosed their Hawaii home and in 1995 obtained a deficiency judgement in the amount of $90,845.  News of these events did not make it to the Gaffneys who were at least free of those cares in Carefree.  In August of 1995 they moved to Cave Creek, Arizona where they continued to have mailed forwarded from their former Hawaii residence.  No news of the foreclosure or deficiency judgement reached them there either.  In 1998 they moved to Oregon.

In 1996 Mr. Gaffney had settled a dispute with the insurer of his business and paid off his various creditors.  He was not aware of the judgment by Bank of America and they were not involved in the settlement.  The problem may have been related to the fact that BOA attributed the loan deficiency to Thomas Gaffney, who according to BOA had the same address and social security number as Dennis Gaffney, who is apparently unacquainted with his fiscal doppelganger.  BOA finally gave up collection action in 2001.  Their last activity was the creation of an asset profile on Thomas Gaffney in April of 2003.

There must have been a BOA accounting minion troubled by perturbances in the big balance sheet in the sky.  In 2006 they issued a 1099-C to the mysterious Thomas using Dennis's social security number and 1998 address.  What the IRS brought to the tax court was the 1099-C and a letter from Bank of America saying that they had reviewed the file and that the amount of discharge was correct and had occurred in 2006.

The court was not impressed.  There was a discussion of when the discharge may have occurred.  The argument for 1994 was fairly strong, but it wasn't really necessary to make an exact determination.  The important point was that whenever the discharge occurred it was well before 2006.