Randolph v. Commissioner
| Decision Date | 09 August 2000 |
| Docket Number | Docket No. 10540-97. |
| Citation | 80 T.C.M. 192 |
| Parties | Loretta Jean Randolph v. Commissioner. |
| Court | U.S. Tax Court |
Loretta Jean Randolph, pro se. J. Anthony Hoefer, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency in petitioner's 1994 Federal income tax of $11,148 and additions to tax under sections 6651(a)(1)1 and 6654 of $2,787 and $575, respectively. The issues for decision2 are (1) whether petitioner realized income of $50,000 under section 61(a)(12) from the discharge of indebtedness; (2) whether she is liable under section 6651(a)(1) for the addition to tax for late filing; and (3) whether she is liable under section 6654 for the addition to tax for failure to pay estimated tax. We hold that petitioner realized income of $50,000 from the discharge of indebtedness and that she is liable for the additions to tax.
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. Petitioner resided in Kearney, Nebraska, when she filed her petition in this case.
On or before December 31, 1977, petitioner's mother and stepfather (the Pattersons) formed Murl Patterson, Inc., a corporation organized under the laws of the State of Nebraska (corporation). Thereafter, commencing on or about December 30, 1977, and continuing at least through January 1, 1983, the Pattersons made a series of gifts of the corporation's common stock to their three daughters and their spouses. By January 1, 1983, petitioner and her now former spouse owned 604 shares of the corporation's stock out of a total of 4,000 shares outstanding.
On April 10, 1989, petitioner received a check made payable to her in the amount of $50,000 and written on an account maintained in the name of the corporation. The check memo line contained the following notation: "10,000 gift 40,000 loan".
Also on April 10, 1989, petitioner signed a promissory note (note) in which she promised to pay the corporation $50,000. The note was payable on demand and did not provide for the payment of interest. Beneath petitioner's signature was the typed instruction to "SEE BACK". The reverse side of the note contained the following typed statement: "Unless sooner terminated, as herein provided, upon the deaths of both Murl E. Patterson and Dorothy E. Patterson, this note shall be cancelled." The Pattersons signed and dated that statement as of November 21, 1991.
Petitioner made no payments on the note. On a Schedule L, Balance Sheet, filed with its 1993 corporate income tax return3 the corporation listed the note among its assets as of yearend 1993 under the category "trade notes and accounts receivable". In addition to petitioner's $50,000 note, the assets included in the trade notes and accounts receivable category included notes given to the corporation by petitioner's two sisters relating to certain amounts they also had received from the corporation. On a Schedule L filed with its 1994 corporate income tax return the corporation listed the note among its assets as of the beginning of 1994 under the category "trade notes and accounts receivable".
During 1993 and 1994, the Pattersons caused a reorganization of the corporation (reorganization) under which its assets were divided among it and three newly formed corporations; i.e., Charity Field Farms, Inc. (Charity), MDA Farms, Inc. (MDA), and M & D Hay & Cattle Co., Inc. (M & D). Pursuant to the plan of reorganization, during 1994 petitioner and her former spouse surrendered their shares of common stock of the corporation in exchange for shares of common stock of Charity and M & D.4 Neither the corporation nor Charity, MDA, or M & D included the note as an asset as of yearend 1994 on the Schedules L they filed with their corporate income tax returns for that year. The record does not reveal whether at any time petitioner had assets sufficient to repay the $50,000.
During 1995, petitioner completed, executed, and submitted to the Internal Revenue Service (the Service) a Form 1040, U.S. Individual Income Tax Return, for the 1994 taxable year (1994 Form 1040). Before submitting the Form 1040, petitioner struck the words "penalties" and "perjury" from the verification portion of that form (jurat) which appeared immediately above her signature. Before that action, the jurat read: "Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete." The 1994 Form 1040 reflected no tax payments made for that year by petitioner, either through withholding or estimated payments.
Respondent determined that petitioner's 1994 Form 1040 did not constitute a valid Federal income tax return because she did not sign it under penalty of perjury. In the notice of deficiency, respondent included $50,000 in petitioner's income on the ground that the corporation had relieved her indebtedness to it by that amount in connection with the reorganization. In addition, respondent determined that petitioner was liable for an addition to tax under section 6651(a)(1) because she had not filed a valid 1994 Federal income return by its due date and for an addition to tax under section 6654(a) because she did not pay sufficient estimated tax for 1994.
OPINIONSection 61(a) provides that gross income means all income from whatever source derived. That section has been interpreted broadly to encompass all gains except those specifically exempted by Congress. See Commissioner v. Glenshaw Glass Co. [55-1 USTC ¶ 9308], 348 U.S. 426, 430 (1955). Gross income, however, generally does not include the value of property acquired by gift or advancements in the nature of loans. See sec. 102(a); Beaver v. Commissioner [Dec. 30,380], 55 T.C. 85, 91 (1970); Gatlin v. Commissioner [Dec. 9250], 34 B.T.A. 50 (1936). On the other hand, it generally does include income from the discharge of indebtedness. See sec. 61(a)(12); United States v. Kirby Lumber Co. [2 USTC ¶ 814], 284 U.S. 1 (1931); see also, e.g., Babin v. Commissioner [94-1 USTC ¶ 50,224], 23 F.3d 1032, 1034 (6th Cir. 1994), affg. [Dec. 48,651(M)] T.C. Memo. 1992-673; Cozzi v. Commissioner [Dec. 43,718], 88 T.C. 435, 445 (1987). The gain to the debtor from the forgiveness of debt results from the freeing up of assets that otherwise would have been required to pay off the debt. See United States v. Kirby Lumber Co., supra; Milenbach v. Commissioner [Dec. 51,266], 106 T.C. 184, 202 (1996). Whether a debt has been discharged depends on the substance of the transaction. See Cozzi v. Commissioner, supra. When a debt has been canceled is determined on the facts and circumstances of each case. See id.; Miller Trust v. Commissioner [Dec. 37,654], 76 T.C. 191, 195 (1981); Estate of Bankhead v. Commissioner [Dec. 32,042], 60 T.C. 535, 539 (1973). Petitioner bears the burden of proving that a discharge of indebtedness does not result in taxable income. See Rule 142(a); Miller Trust v. Commissioner, supra.5
Respondent contends that the corporation lent petitioner $50,000 in 1989 and that the debt remained unpaid and an asset of the corporation until April 11, 1994, when enforcement on the debt expired by operation of law.6 Respondent further contends that the corporation canceled petitioner's obligation on the note during 1994. Thus, respondent asserts, petitioner realized income during 1994 in the amount of $50,000 from the discharge of indebtedness.
Petitioner, on the other hand, contends that she realized no taxable income during 1994 relating to the forgiveness of debt. She maintains that when she received the $50,000 from the corporation the Pattersons had agreed to treat the payment as a gift. According to petitioner, the Pattersons gifted $10,000 of the $50,000 during 1989, and agreed to gift the remaining $40,000 over a 4-year period commencing in 1990 by canceling $10,000 of her indebtedness to the corporation each year until the loan was paid in full. Petitioner claims that by yearend 1993 the Pattersons had gifted the total $50,000 to her by forgiving all of her indebtedness to the corporation.
A payment constitutes a gift if it is given in a spirit of "`detached and disinterested generosity,' * * * `out of affection, respect, admiration, charity or like impulses.'" Commissioner v. Duberstein [60-2 USTC ¶ 9515], 363 U.S. 278, 285 (1960). The intent of the transferor determines whether a payment constitutes a gift or something else; e.g., a loan or compensation for services. See id. at 285-286; see also Goodwin v. United States [95-2 USTC ¶ 50,534], 67 F.3d 149, 151-152 (8th Cir. 1995); Estate of Cronheim v. Commissioner [63-2 USTC ¶ 9757], 323 F.2d 706, 707 (8th Cir. 1963), affg. [Dec. 24,983(M)] T.C. Memo. 1961-232.
For tax purposes, a valid debt requires the existence of an unconditional obligation to repay. See Milenbach v. Commissioner, supra at 197; Midkiff v. Commissioner [Dec. 47,353], 96 T.C. 724, 734-735 (1991), affd. sub nom. Noguchi v. Commissioner [93-1 USTC ¶ 50,250], 992 F.2d 226 (9th Cir. 1993); Howlett v. Commissioner [Dec. 30,917], 56 T.C. 951, 960 (1971). Thus, an essential element for a payment to constitute a loan is the existence of a debtor-creditor relationship; i.e., there must be an intent on the part of the recipient of the funds to make repayment and an intent on the part of the person advancing the funds to require repayment. See Fisher v. Commissioner [Dec. 30,084], 54 T.C. 905, 909-910 (1970); Mercil v. Commissioner [Dec. 21,259], 24 T.C. 1150 (1955). We look to both testimony and objective facts to ascertain intent. See Busch v. Commissioner [84-1 USTC ¶ 9266], 728 F.2d 945, 948 (7th Cir. 1984), affg. [Dec. 39,914(M)] T.C Memo. 1983-98; Commissioner v. Makransky [63-2 USTC ¶ 9585], 321 F.2d 598, 600 (3d Cir. 1963), affg. [Dec. 24,865] 36 T.C. 446 (1961). Testimony is not...
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