I don’t know whether Keith A. Newman, Jr., 2016 T. C. Memo. 125, filed 6/28/16, is going to lift up his head and shout “There’s Gonna Be a Great Day,” as Billy Rose, Vincent Youmans and Edward Eliscu adjured him to do back in 1929.

But he beats a $7800 rap for COD from a bounced check on a BOA account years ago because he was down and out (insolvent) at the time, and Section 108(a)(1)(b), plus his truthful testimony, rescue him.

Briefly, just before the 36-month lookback of Reg. Section 1.6050P-1(b)(2)(iv) began, Keith bounced a check. BOA never chased him for it, and sent him a Form 1099-C. Keith never reported the COD, which earned him a SNOD.

Keith was unemployed, and testified believably that he then owed big on his wheels and his student loans.

“Section 108(a)(1)(B) excludes COD income from gross income if the discharge of indebtedness occurs when the taxpayer is insolvent.  The amount by which the taxpayer is insolvent is defined as the excess of the taxpayer’s liabilities over the fair market value of the taxpayer’s assets.  Sec. 108(d)(3).  Whether a taxpayer is insolvent and by what amount is ‘determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.’  Id.  The amount of income excluded under section 108(a)(1)(B) cannot exceed the amount by which the taxpayer is insolvent.  Sec. 108(a)(3).” 2016 T. C. Memo. 125, at p. 6.

Keith was discharged when BOA sent the 1099-C. Now a 1099-C, by itself, isn’t dispositive.

But Keith paid nothing, and BOA got nothing from Keith, during the 36-month lookback ending when BOA sent the 1099-C. The creditor had ceased to pursue Keith on the debt (thus COD), except Keith was insolvent at the magic moment, hence off the hook.

I cannot close without a tip of the battered Taishoff Stetson to James R. Monroe, Esq., Keith’s attorney, for taking on and winning a $4k deficiency. That’s the stuff that gets sent to the law school low-income tax clinics in most places. If James R. Monroe, Esq., did this one pro bono, he honors the profession.