Thursday, October 30, 2008
The Tax Court yesterday required David Plotinsky, Assistant Counsel in the Office of General Counsel of the U.S. House of Representatives, to include in income $3,043 of law school and college student loans that were forgiven when he consolidated his loans with the lender. Plotinsky v. Commissioner, T.C. Memo. 2008-244 (10/30/08):
Pursuant to AES's incentive program, if an individual were to consolidate the individual's student loans by taking out a loan from AES ... and the individual were to make 36 consecutive on-time monthly payments on the AES loan, AES would discharge a portion of that loan.
Petitioner was aware of AES's incentive program when in August 2001, after graduating from law school, he consolidated petitioner's Federal student loans through AES ...
In 2004, pursuant to AES's incentive program and as a result of 36 consecutive on-time payments having been made on petitioner's consolidated student loan, AES discharged $3,043 of that loan.
AES issued Form 1099-C, Cancellation of Debt (2004 Form 1099-C), to petitioner for his taxable year 2004. That form showed $3,043.28 as the amount of debt canceled. The instructions to the 2004 Form 1099-C that AES sent to petitioner stated in pertinent part: "Generally, if you are an individual, you must include the canceled amount on the 'Other Income' line of Form 1040. * * * However, some canceled debts are not includible in your income."
Petitioner timely filed Form 1040, U.S. Individual Income Tax Return, for his taxable year 2004 (petitioner's 2004 return). In that return, petitioner reported gross income of $76,917 that did not include the $3,043.28 of petitioner's consolidated student loan that AES discharged. Petitioner attached to petitioner's 2004 return a document (petitioner's attachment to petitioner's 2004 return) that stated in pertinent part:
I received a Form 1099-C from AES Graduate & Professional Loan Services ("AES"), which stated a cancellation of debt in the amount of $3043.28. I am not reporting this amount as income because it is my reading of Internal Revenue Service Pub. 525, at 17-18, that this cancellation constitutes a gift rather than income.
AES is the lender with which I consolidated my law school loans approximately three years ago. As an incentive to select AES as my lender, AES offered a reduction in the total amount of my loans, and it is this offer that forms the entire basis for the debt cancellation of $3043.28. The offer was contingent upon my making 36 consecutive on-time monthly payments, and now that this has been achieved the debt cancellation is locked in.
Mr. Plotinsky represented himself in the case, and the judge was not impressed with his argument:
In relying solely on Helvering v. Am. Dental Co., 318 U.S. 322 (1943), to support his position that AES's discharge of $3,043 of petitioner's consolidated student loan constituted a gift under section 102(a), petitioner fails to acknowledge that the Supreme Court in Commissioner v. Jacobson, and Commissioner v. Duberstein, requires us to consider AES's intention in discharging $3,043 of petitioner's consolidated student loan. We shall do so now. ...
On the record before us, we find that AES did not intend to discharge $3,043 of petitioner's consolidated student loan out of "detached and disinterested generosity" ... or "out of affection, respect, admiration, charity or like impulses" ... On that record, we further find that petitioner has failed to carry his burden of establishing that, in discharging $3,043 of petitioner's consolidated student loan, AES intended to make a gift to him.
Based upon our examination of the entire record before us, we find that the $3,043 of petitioner's consolidated student loan that AES discharged is not excludable for his taxable year 2004 from his gross income under section 102(a). On that record, we further find that petitioner must include for that year that amount in his gross income.[FN]
FN: On brief, petitioner further argues that, even if we were to find that the $3,043 of petitioner's consolidated student loan that AES discharged is includible in his gross income, he should recognize that income over the remaining life of petitioner's consolidated student loan. We reject that argument. Income from the discharge of indebtedness is income for the year in which the indebtedness is discharged. Sec. 61(a)(12); see Jelle v. Commissioner, 116 T.C. 63 (2001).