Judge Elizabeth Crewson Paris has bad news for my litigator colleagues, but good news for Katrina E. White, T. C. Memo. 2023-77, filed 6/21/23. Katrina was insolvent when the bank wrote off her small business loan, hence no cancellation of debt income to Katrina.

It’s an all-too-common story of the small entrepreneur. Katrina “…owned and operated Professional Body Sugaring, LLC, in Menomonee Falls, WI.” T. C. Memo. 2023-77, at p. 2. She borrowed $15K from a bank, and claims she borrowed a further $8K from family. She made a couple payments (hi, Judge Holmes) on each, but not enough Menomonee Fallers fell for having their bodies sugared. My sources tell me this is having all or part of your personage covered with a paste of sugar, water, and lemon, which, when dried, is untimely ripp’d, taking your body hair with it.

I’m not surprised. Katrina’s operation was a great lemonade.

Sadly, as this happened, her landlord accelerated her rent for nonpayment, claiming she owed $21K. Sounds like WI follows the old commonlaw rule: landlords need not mitigate damages.

Katrina claims Section 108(a)(1)(B) relief, as she was insolvent when relieved of the bank loan debt.

IRS says Katrina wasn’t insolvent, because her landlord didn’t sue, and she didn’t pay, hence the accelerated rent wasn’t a bona fide debt.

Judge Paris sees IRS off.

“The Court disagrees. Petitioner provided a copy of the lease agreement, as well as a letter from [landlord], stating that petitioner breached the lease [in year at issue]…. The terms of the agreement creating the obligation to pay generally determine whether and in what amount the taxpayer will be called upon to pay. Under the terms of the lease, the entire amount remaining on the lease would become immediately due. The lease agreement between petitioner and [landlord] was an arm’s-length transaction for a multiyear lease on commercial real estate, and the obligation to pay was legally enforceable at the time the…small business loan debt was discharged. Nothing in the record suggests otherwise. The fact that [landlord] did not sue petitioner to collect the debt does not in and of itself mean, as respondent suggests, that it was not a bona fide debt. Respondent cites no authority for the requirement that, for the Court to determine insolvency under section 108(a)(1)(B), a creditor must bring legal action or the taxpayer’s liabilities must be brought to judgment, and the Court is aware of none.” T. C. Memo. 2023-77, at p. 6. (Citation omitted).