T.C. Summary Opinion 2007-214



                     UNITED STATES TAX COURT



             KEVIN AND DEBORAH KEITH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5757-05S.             Filed December 26, 2007.



     Stephen G. Bresset, for petitioner.

     Kristina L. Rico, for respondent.


     CARLUZZO, Special Trial Judge:    This case was heard

pursuant to the provisions of section 7463.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any


     1
        Unless otherwise indicated, section references are to
the Internal Revenue Code of 1986, as amended, in effect for
the relevant period. Rule references are to the Tax Court
Rules of Practice and Procedure.
                               - 2 -

other court, and this opinion shall not be cited as precedent for

any other case.

     Respondent determined a $12,448 deficiency in petitioners’

2002 Federal income tax and imposed a $2,490 section 6662(a)

accuracy-related penalty.   The issues for decision are:   (1)

Whether petitioners realized cancellation of indebtedness income

as a result of a foreclosure proceeding involving their

residence; and, if so (2) whether the underpayment of tax

required to be shown on petitioners’ 2002 Federal income tax

return is a substantial understatement of income tax.

                            Background

     Some of the facts have been stipulated and are so found.

Petitioners are married to each other.    Their joint 2002 Federal

income tax return was timely filed.    At the time the petition was

filed, they resided in Pennsylvania.

     In 1994, petitioners purchased a parcel of land in

Tobyhanna, Pennsylvania, for the purpose of constructing a house

to be used as the family residence (the property).   Petitioners

financed the purchase of the land and/or the construction of the

house through a $118,825 loan (the loan) from America’s Wholesale

Lender, now know as Countrywide Home Loans, Inc. (Countrywide).

The loan was evidenced by a note and secured by a mortgage on the

property, each dated September 2, 1994.
                              - 3 -

     Petitioners apparently defaulted on their obligation to

repay the loan according to the terms of the note.    As a result,

on December 13, 2000, foreclosure proceedings were initiated by

Countrywide, and on August 29, 2002, the property was seized from

petitioners pursuant to a writ of execution.    On November 26,

2002, the property was sold for $80,500 to third-parties.

     At the time the foreclosure proceeding was initiated, the

principal balance on the loan was $112,035.    In accordance with

Pennsylvania procedures in such matters, for purposes of the

foreclosure proceeding, the property was valued pursuant to a

Broker’s Price Opinion in a range from $90,000 to $100,000

depending upon the “marketing time”.2

     Countrywide’s recovery on the note as a result of the

foreclosure proceeding is not known.    To the extent that it

received less than petitioners owed, the company, although

entitled to do so under Pennsylvania law, did not seek a

deficiency judgment against petitioners.    As Countrywide viewed

the matter, following the foreclosure proceeding, petitioners

owed the company $22,035, computed by subtracting the lower range

of the Broker’s Price Opinion, that is $90,000 from the amount of

principal on the loan then outstanding, that is $112,035.

Because Countrywide did not seek a deficiency judgment against

     2
       The phrase “marketing time” as used in the valuation
report is not familiar to the Court, and neither party offered an
explanation as to what it means.
                                 - 4 -

petitioners, the company was precluded under State law from

collecting that amount.     As evidenced in a Form 1099-C,

Cancellation of Debt, issued to petitioners by Countrywide,

$22,035 of the debt originating from the loan was forgiven during

2002.

     Immediately preceding the foreclosure of the mortgage,

petitioners had assets totaling $133,715 and liabilities

totaling $155,505.59.3

     Petitioners did not include any amount of cancellation of

indebtedness income on their 2002 return.     In the notice of

deficiency respondent increased petitioners’ income by the amount

reported as cancellation of indebtedness on the Form 1099-C.

Other adjustments made in the notice of deficiency have been

agreed to by the parties.

                              Discussion

     In general, the term “income” as used in the Internal

Revenue Code means income from any source, including income from

the discharge of indebtedness.     Sec. 61(a)(12); Commissioner v.

Glenshaw Glass Co., 

(1955).     In this case, during

the year in issue, Countrywide forgave $22,035 of the debt owed

to it by petitioners as a result of the loan.     According to

respondent, that amount is includable in petitioners’ 2002


     3
       The stipulated amount shown for assets includes the value
of the residence at $90,000.
                               - 5 -

income.

     Petitioners claim that they were insolvent at the time of

the discharge, and, therefore, the amount of debt forgiven is

excludable from their 2002 income.     See sec. 108(a)(1)(B).

     For purposes of section 108(a)(1)(B) the term “insolvent”

means “the excess of liabilities over the fair market value of

assets” as determined “immediately before the discharge.”       Sec.

108(d)(3).   Respondent acknowledges that petitioners were

insolvent to the extent of $21,790.59 immediately before the

discharge.   Nevertheless, relying upon an inapplicable regulation

and precedent from a case superseded by the enactment of section

108(a)(1)(B),4 respondent argues that “in order to qualify for

the insolvency exception, the taxpayer must be insolvent both

immediately before and immediately after the discharge of

indebtedness.”   Respondent points out that petitioners have

failed to establish that they were insolvent immediately

following the discharge and argues that the provisions of section

108(a)(1)(B) do not apply.   Petitioners’ financial status

immediately after the discharge, although disputed by the

parties, is, simply put, not relevant.

     Turning our attention to petitioners’ financial status

immediately before the discharge, and otherwise ignoring various


     4
       Sec. 108 was amended by the Bankruptcy Tax Act of 1980,
Pub. L. 96-589, sec. 2(a), 94 Stat. 3389.
                              - 6 -

of the parties’ positions that we find to have no merit, we make

the following findings regarding petitioners’ financial status

immediately before the discharge:   (1) The fair market value of

the property subject to the foreclosure proceeding was $90,000

(per stipulation of the parties); (2) petitioners had other

assets totaling $43,715 (per stipulation of the parties); (3)

petitioners’ liability to Countrywide was not less than $143,280

(per stipulation of the parties); and (4) petitioners’ other

liabilities totaled not more than $12,224.79 (liabilities

substantiated per stipulation of the parties).   Plugging these

amounts into the equation contemplated by the statute, we find,

as respondent acknowledges in his brief, that immediately before

the discharge, petitioners’ liabilities exceeded their assets by

$21,790.59, and therefore, within the meaning of section

108(a)(1)(B), petitioners were insolvent to that extent for

purposes of section 108.

     Section 108(a)(3) limits the exclusion provided in section

108(a)(1)(B) to the “amount by which the taxpayer is insolvent.”

Applying the $21,790.59 exclusion against the $22,035 discharged

results in $244.41 that is includable in petitioners’ 2002

income as a result of the discharge of their indebtedness to

Countrywide.

     Respondent imposed a section 6662(a) accuracy-related

penalty upon the ground that the underpayment of tax required to
                                 - 7 -

be shown on petitioners’ 2002 return is a substantial

understatement of income tax.    Considering the foregoing, the

understatement will be far less than the amount required for the

imposition of the penalty.   See sec. 6662(d).   Respondent’s

imposition of the section 6662(a) accuracy-related penalty is

rejected.

     To reflect the foregoing,


                                 Decision will be entered

                         under Rule 155.