To paraphrase the late great John Lennon’s 1968 hit, that’s what Thomas Tran wanted in his not-for- nuthin’ Section 7463 small claimer, 2012 T. C. Sum. Op.  210, filed 11/6/12. And Judge Swift gives it to him.

Tom got into trouble with his credit cards, and the banks were breathing down his proverbial. Tom found a debt resolution outfit that charged him $2400 to cut $6700 off his aggregate debt. The banks sent Tom 1099-Cs, but Tom didn’t bother reporting the cancellation of debt income. IRS remedied that defect by giving Tom a SNOD.

Tom claimed an offset of the $2400 he paid as a deduction against the income, but that doesn’t fly. “Specific statutory exclusions or offsets from gross income are provided in sections 101 through 140. Of these only section 108 could possibly apply in this case. Section 108 excludes from gross income COI in certain circumstances such as insolvency of the taxpayer. No evidence before us establishes petitioner’s insolvency, and as indicated, the parties have stipulated that the sole issue before us is the legal issue described above.

“The fees before us were paid to a third-party debt resolution company and would not qualify to be treated as some type of merchant or company discount.”  2012 T. C. Sum. Op. 210, at p. 4.

Tom next claims miscellaneous itemized deduction for the $2400, arguing money spent for production of income. In an example of unjustified reliance that would get a taxpayer who made that argument hanged, IRS tries to deny Tom the deduction based on a footnote. “As authority in this case for not allowing a miscellaneous itemized deduction for the $2,343 respondent erroneously relies on Melvin v. Commissioner, T.C. Memo. 2009-199. However, in that case we simply noted in a footnote that the taxpayer therein conceded any claim to a deduction under section 212(1) for fees paid to a debt resolution company because of application to the taxpayer of the alternative minimum tax. Melvin provides no support for respondent’s position herein that fees paid to a debt resolution company, as a matter of law, may not be deducted under section 212(1).” 2012 T. C. Sum. Op. 210, at p. 5.

Nobody claims the money paid to the debt resolution company was excessive, out of the ordinary or unnecessary. The debt resolutionists did get Tom $6700 in relief for his $2400 expenditure. Without their efforts, no one suggests Tom would have gotten anything.

So Tom can have his miscellaneous itemized deduction, subject to the 2% AGI floor and any AMT disallowance of miscellaneous itemized deductions.

IRS tries a last-gasp rescue of its losing case in its post-trial brief, but Judge Swift dismisses it in a footnote: “In his posttrial brief respondent suggests that petitioner has not substantiated that the fees paid to the debt resolution company were paid in 2008. However, at the hearing held on April 12, 2012, respondent conceded that the fees were paid by petitioner, and respondent and petitioner stipulated that the only remaining issue was the legal issue described above. Respondent’s attempt to raise on brief a fact issue relating to whether petitioner paid the fees in 2008 is rejected.” 2012 T. C. Sum. Op. 210, at p. 6, footnote 3.

IRS didn’t cover itself with glory in this case.

Oh, and I misquoted the 1968 Beatles hit in my blogpost “Stipulate, Don’t Capitulate”, 9/23/11.