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Taxpayer's Cancer Doesn't Negate Liability for Tax on Discharged Debt Income.

(Parker Tax Publishing November 5, 2015)

Where a taxpayer's debt was discharged, he could not rely on statements from the lender and IRS employees that such discharge was excludible from income; nor was there was there any hardship provision that excluded such discharge from income because of the taxpayer's cancer. Dunnigan v. Comm'r, T.C. Memo. 2015-190.

Donald Dunnigan was the sole proprietor of Donald Dunnigan Period House Appraisal (Dunnigan Appraisal). In 2008, Dunnigan Appraisal received a business line of credit for $50,000 from Swift Financial/M&I Bank FSB (Swift). The credit agreement provided that Dunnigan, both individually and on behalf of Dunnigan Appraisal, was liable for repayment. In 2009, Dunnigan was unable to pay back the borrowed funds in full. He negotiated with Swift to pay approximately $16,000 in settlement of the debt and Swift later reported on Form 1099-C, Cancellation of Debt, that it had canceled Dunnigan's debt of approximately $34,000 on September 28, 2009. It further indicated in Box 5 of Form 1099-C that Dunnigan was not personally liable for repayment of the debt.

On his Form 1040 for 2009, Dunnigan reported cancellation of debt income of approximately $68,000, consisting of three discharges of indebtedness from entities other than Swift. He did, however, include with his return a copy of the Form 1099-C issued by Swift and handwrote on it the following:

"Please note: Swift Financial indicated to me that I am not liable for repayment of cancelled debt. I had explained to them that I have a serious cancer problem, and that Im [sic[ 76 years old. Thus they marked Box 5 No'. The local IRS office suggested I explain the situation at time of filing, and felt it would likely come under Hardship' rules for approval."

The IRS determined that the discharge by Swift was taxable income to Dunnigan and assessed a deficiency. Before the Tax Court, Dunnigan argued that Swift and IRS employees told him that "hardship" rules could apply in his case and, thus, the discharged debt was not taxable income to him.

While expressing sympathy for Dunnigan's situation, the Tax Court held that Dunnigan was taxable on the discharged debt. The court noted that there is no hardship exception to the taxability of discharge of indebtedness income. While there are exceptions to recognizing such income, none applied to Dunnigan's situation. The court also found Dunnigan's reliance on alleged statements by Swift and IRS employees unpersuasive, noting that administrative guidance by the IRS is not binding, nor can it change the plain meaning of tax statutes. For a discussion of the exceptions to the taxability of discharge of indebtedness income, see Parker Tax ¶72,315. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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