Decision will be entered under
MORRISON,
The issues for decision are: (1) Did McAllister receive unreported compensation income of $78,849 during the 2007 tax year, or in the alternative, did McAllister receive $78,849 of unreported cancellation-of-debt income (before application of the insolvency exception of (2) What portion of the $78,849 of unreported cancellation-of-debt income is excludable 2013 Tax Ct. Memo LEXIS 97">*98 from McAllister's income because he was insolvent? We hold that $22,641.42 is excludable from McAllister's income. (3) Is McAllister liable for an accuracy-related penalty under
McAllister timely filed a petition with the Tax Court disputing the determinations of the IRS. At the time of filing, McAllister resided in North Carolina.
In 2005 McAllister worked as an employee for Suncoast Roofers Supply. During this time he borrowed money from Suncoast Roofers Supply as follows:
Feb. 21, 2005 | $11,480.00 |
Oct. 21, 2005 | 29,869.07 |
Nov. 16, 2005 | 2,500.00 |
Dec. 2, 2005 | 9,000.00 |
Dec. 19, 2005 | 26,000.00 |
Total | 78,849.07 |
Suncoast Roofers and McAllister executed a promissory note for each of the advances. Pursuant to the loan arrangements, McAllister was to repay the loans from bonuses earned through incentive plans as part of his compensation. Suncoast Roofers agreed to pay McAllister the amounts of any tax liabilities from the earning of bonuses. The loans had no repayment date and required no interest payments. McAllister made no repayments of the loans.
*99 In 2007 Suncoast Roofers ran into financial difficulties. By August 2007 McAllister was no 2013 Tax Ct. Memo LEXIS 97">*99 longer its employee. Suncoast Roofers was sold to Suncoast Acquisition Corp. McAllister timely filed Form 1040, U.S. Individual Income Tax Return, for 2007 in March 2008. In May 2008 Suncoast Acquisition Corp. issued McAllister a Form 1099-MISC, Miscellaneous Income, showing the amount of the loans and characterizing the amount as nonemployee compensation paid in 2007. On his Form 1040 McAllister did not report as income the $78,849.07 that was later reported to him on the Form 1099-MISC. On May 11, 2009, the IRS issued the notice of deficiency.
The taxpayer bears the burden of proving by a preponderance of the evidence that the IRS's determinations in the notice of deficiency are incorrect.
Gross income includes all income from whatever source derived.
It is undisputed that Suncoast Roofers loaned McAllister $78,849.07 in 2005. The IRS contends that in 2007 Suncoast Roofers awarded McAllister a bonus of $78,849.07 that he used to repay the $78,849.07 in loans. Thus, the IRS contends, McAllister must include $78,849.07 in income as compensation. McAllister takes the position that he did not receive a constructive bonus in 2007 and that either (1) the loans were not canceled because he still intends to pay them back, or (2) alternatively, even if the loans were canceled in 2007 he was insolvent.
McAllister 2013 Tax Ct. Memo LEXIS 97">*101 credibly testified that Suncoast Roofers did not inform him of a bonus (constructive or otherwise) of $78,849.07 in 2007. By August 2007 McAllister was no longer an employee of Suncoast Roofers. Suncoast Roofers *101 experienced financial difficulties during 2007 leading to its eventual sale. Therefore, we reject the IRS's contention that McAllister earned a $78,849.07 constructive bonus in 2007.
However, we find the loans totaling $78,849.07 were canceled in 2007. Suncoast Roofers was acquired by another company, Suncoast Acquisition Corp., which never contacted McAllister about paying back the loans. The Form 1099-MISC, we find, memorialized Suncoast Acquisition Corp.'s decision to forgive the McAllister debt that it acquired from Suncoast Roofers. The Form 1099-MISC improperly 1 classified the amount of the forgiven debt as nonemployee compensation income of $78,849.07. We find this was a bookkeeping error rather than a reflection that McAllister had been awarded a bonus. We find that by the end of 2007 it was clear that McAllister would not have to repay the debt. Therefore, McAllister had $78,849.07 in cancellation-of-debt income in 2007.
McAllister claims that his assets and liabilities at the end of 2007 were as follows:
Bank accounts | $2,667.07 |
Savings account | 2,000.66 |
Real estate FL | 130,000.00 |
Real estate NC | 175,000.00 |
Automobile | 22,000.00 |
Total | 331,667.73 |
Home Depot account | 4,879.00 |
Mortgages | 363,068.15 |
State taxes | 1,485.00 |
Automobile loan | 19,897.00 |
Total | 389,329.15 |
Amount of insolvency | 57,661.42 |
Insolvency 2013 Tax Ct. Memo LEXIS 97">*103 is a question of fact.
McAllister testified that he purchased the property in North Carolina for $191,020 in December 2006 but that by the end of 2007 its value had declined to $175,000. He based the $175,000 estimate on a sale of a property in the same neighborhood in January 2007. The IRS contends that the value of the North *104 Carolina property was $201,650, which was the property's assessed value for local property tax 2013 Tax Ct. Memo LEXIS 97">*104 purposes in January 2008.
We find that the value of McAllister's property was $191,020 at the end of 2007. This is the price at which McAllister had bought the property a year before. We do not rely on the January 2007 sale of another property. The sale took place only a month after the purchase of McAllister's property, and we doubt that the property was comparable to McAllister's property. We do not rely on the assessed value of McAllister's property for local property tax purposes. "[A] value placed upon property for the purpose of local taxation, unsupported by other evidence, cannot be accepted as determinative of fair market value for Federal income tax purposes in the absence of evidence of the method used in arriving at that valuation."
McAllister credibly testified that he purchased the property in Florida in March 2005 for $149,000. He testified that its value by the end of 2007 was $130,000 based on its assessed value for local property tax purposes. He did not *105 explain the 2013 Tax Ct. Memo LEXIS 97">*105 method by which the assessed value was determined. We find that the value of the property at the end of 2007 was $149,000.
In summary, we find that McAllister's liabilities at the end of 2007 exceeded his assets by $22,641.42.
Bank accounts | $2,667.07 |
Savings account | 2,000.66 |
Real estate FL | 149,000.00 |
Real estate NC | 191,020.00 |
Automobile | 22,000.00 |
Total | 366,687.73 |
Home Depot account | 4,879.00 |
Mortgages | 363,068.15 |
State taxes | 1,485.00 |
Automobile loan | 19,897.00 |
Total | 389,329.15 |
Amount of insolvency | 22,641.42 |
The amount of income excluded under the insolvency exception of
The IRS has the burden of producing evidence that a taxpayer is liable for penalties.
In this case, the IRS has satisfied its burden of production if the
McAllister did not report cancellation-of-indebtedness income, resulting in an underpayment of tax. The
1. The proper form to issue when canceling debt is a Form 1099-C, Cancellation of Debt.↩