Attorney-at-Law

SUNK BY THE NAVY?

In Uncategorized on 09/28/2011 at 19:05

Maybe not, in the case of Thomas and Monica L. Kleber, 2011 T.C. Mem. 233, filed 9/28/11. The issue is when was Farmer Monica relieved of her obligations for past due rent, interest and administrative fee she owed to the U. S. Navy.

Farmer Monica leased land at the NAS Lemoore, CA for agricultural purposes. The lease term was four calendar years, but during Year Two Farmer Monica quit paying rent and at year-end told the Navy she was giving up the farm.

Manning battle stations, the Navy sent Farmer Monica notices of default, lease cancellation notice, demands for payment, and, when these availed not, sent the matter to the Defense Finance and Accounting Services (DFAS), the bill collector, to get the Navy its money. DFAS sent a collection letter and then did nothing for almost a year-and-a-half, then bucked the problem to Treasury Cross-Service Program, who might have been cross but performed no service, and took three years to send the file back to DFAS, stating the bill was uncollectable. A year later, DFAS writes off the debt, and still another year later Farmer Monica gets a 1099-C, Cancellation of Debt, showing $263K of cancelled debt.

Farmer Monica and Husband Tom file their return timely but don’t mention the $263K. Surprise, surprise, 90-day letter follows.

Farmer Monica and Husband Tom petition, saying “Wrong year, amount claimed is wrong, anyway debt cancelled years ago, statute has run, anchors aweigh.”

Take it away, Judge Haines:  “If an information return, such as a Form 1099-C, serves as the basis for the determination of a deficiency, section 6201(d) may apply to shift the burden of production to the Commissioner. Section 6201(d) provides that in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to the income reported on an information return and the taxpayer has fully cooperated with the Commissioner, then the Commissioner has the burden of producing reasonable and probative information in addition to the information return.” 2011 T.C. Mem. 233, at p. 5.

IRS puts in all the dunning letters from the Navy and DFAS, and a timeline showing everything that happened. Judge Haines says that’s good enough to meet the Section 6201(d) burden of production.

OK, but when was the debt actually canceled or discharged? Judge Haines again: “The moment it becomes clear that a debt will never be repaid, that debt must be viewed as having been discharged. The determination of whether discharge of indebtedness has occurred is fact specific and often turns on the subjective intent of the creditor as manifested by an objectively identifiable event.” 2011 T. C. Mem 233, at pp. 6-7. [citation omitted.]

Judge Haines goes on: “There is a rebuttable presumption that an identifiable event has occurred during a calendar year if a creditor has not received a payment on an indebtedness at any time during a testing period ending at the close of the year. Sec. 1.6050P-1(b)(2)(iv), Income Tax Regs. The testing period is a 36-month period increased by the number of calendar months during all or part of which the creditor was precluded from engaging in collection activity by a stay in bankruptcy or similar bar under State or local law.” 2011 T. C. Mem. 233, at pp. 7-8.

Of course presumptions were made to be rebutted, and this the Navy can do if it showed it “…engaged in significant, bona fide collection activity at any time during the 12-month period ending at the close of the calendar year, or if facts and circumstances existing as of January 31 of the calendar year following expiration of the 36-month period indicate that the indebtedness has not been discharged. Significant, bona fide collection activity does not include nominal or ministerial collection action, such as automated mailing.” 2011 T. C. Mem 233, at p. 8.

The documents IRS proffered show no significant collection activity–no lien, no sale of the debt, or anything that an active creditor would do. Letters aren’t enough.

The Navy was asleep on watch.  The debt was canceled long before the year for which the 1099-C was issued, the statute has run, and the ship has left. Oh, by the way, no penalty for Farmer Monica.

Takeaway: Creditors, on deck! Stand to your guns!

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