This case established that an individual has no basis in cr

1

• Memo to File-3-1
• Client Gerald A. Bunker
• Subject Insurance Payment of Indebtedness
• For Tax Partner
• Researched
• By Tax Student-3
• Date Sept 4, 2005

2

• Facts-3-2
• Gerald A. Bunker lost his job when a hurricane
  destroyed his employers facilities. Prior to
  that event, Bunker had accrued credit card debt
  of approximately 45,000. While employed, Bunker
  had purchased insurance on his credit cards that
  would cover payment of his debt in the event of
  death, disability or unemployment. As a result,
  15,844.09 of Bunkers debt was paid per the
  insurance contracts in 2001. Bunker did not
  report this amount as part of his income in tax
  year 2001.

3

• Issues-3-3
• 1. Are the payments by the insurance companies
  totaling 15,844.09 subject to tax?
• Conclusions
• 1. The payments made by the insurance companies
  are considered income under section 61(a)(12) and
  108(a)(1)(B).

4

• Discussion of Reasoning and Authorities-3-4
• 1. Gross income includes income from discharge
  of indebtedness (unless otherwise noted) under
  section 61(a)(12).
• Income from discharge of indebtedness is excluded
  from gross income when the taxpayer is insolvent
  under section 108(a)(1)(B). In this case, the
  client is not insolvent, therefore the income is
  not excluded.

5

• Memo to File
• Client Joe Taxpayer
• Subject Credit card debt paid by insurer
• For Tax Partner
• Researched by Tax Research Student-1-1
• Date September 6, 2005

6

• Facts-1-2
• Joe Taxpayer, employed at Kelly Air Force Base,
  purchased credit card insurance that provided for
  payment of a portion of acquired credit card debt
  upon the occurrence of death, disability, or
  unemployment. Due to events out of Taxpayers
  control, Taxpayer lost his employment. This event
  satisfied one of the three occurrences that
  allowed Taxpayer to apply for insurance benefits.
  After applying for such benefits, the insurance
  provider approved and made payments to various
  credit card grantors in 2001 on behalf of
  Taxpayer totaling 11,396. The insurance provider
  reported these payments to the IRS as
  miscellaneous income. In spite of this, Taxpayer
  did not report these payments as income on his
  2001 individual income tax return.

7

• Issues-1-3
• 1. Are payments made to credit card grantors
  pursuant to credit card insurance policies income
  to the debtor?
• Conclusions
• 1. Payments made to credit card grantors by an
  insurance carrier on behalf of the credit card
  grantee are considered income under IRC Sec. 61.

8

• Discussion of Reasoning and Authorities-1-4A
• IRC Sec. 61(a) defines gross income as all
  income from whatever source derived, unless
  specifically excepted. Furthermore, IRC Sec.
  61(a)(12) provides that gross income includes
  income from discharge of indebtedness.

9

• Discussion of Reasoning and Authorities-1-4A
• Under the provisions of the insurance policy,
  Taxpayer realized economic benefits when the
  insurer made payments on his behalf in the form
  of debt relief. Although Taxpayer did not
  directly receive the payments under the policy,
  the payment of a legal obligation of a taxpayer
  is income to him even though such income is not
  actually received by him. Amos v. Commissioner,
  47 T.C. 65,70 (1966).

10

• Discussion of Reasoning and Authorities-1-4B
• Generally, insurance payments that represent a
  replacement of property that has been destroyed
  or damaged are not taxable to the extent of the
  basis in the property. Unlike insurance recovery
  amounts for damaged property, insurance payments
  for debt relief have no basis. The payments made
  by the insurer represented damages for lost
  profits, and thus, are income. T.C.
  Memo.2005-35.

11

• Client Client-2-1
• Subject Credit Card Insurance Payments
• For Dr Godfrey
• Researched by Tax-Student 2
• Date September 6, 2005

12

• Facts-2-2
• Client recently became unemployed after a
  hurricane destroyed his workplace. He had
  10,000 in credit card debt at the time and
  credit card insurance that paid the debt when he
  became unemployed.
• Issues
• Will payment of credit card debt cause client to
  have taxable income?

13

• Conclusions-2-3
• Clients payment of credit cards is a discharge
  of indebtedness.
• Client was not insolvent and therefore cannot
  exclude from income any of the payments towards
  his credit card debt.

14

• Discussion of Reasoning and Authorities-2-4
• Section 108(a)(1)(B) provides that Gross income
  does not include any amount that would be
  includible in gross income by reason of the
  discharge of indebtedness of the taxpayer if the
  discharge occurs when the taxpayer is insolvent.
• Section 108(a)(3) limits the exclusion from
  income to the amount of insolvency.
• In Gereald A. Bunker, Petitioner v. Commissioner
  (TC Summary Opinion 2005-35) the tax court ruled
  that payments by credit card insurance companies
  toward the balance owed on credit cards were
  discharge of indebtedness because the taxpayer
  was relieved of the obligation to pay the issuers
  of his credit card.

15

• Memo to File
• Client Jobless Dude
• Subject Taxability of Debt Payment
• For Client
• Researched by Tax Student
• Date September 3, 2005

16

• Facts
• Jobless Dude lost his job when a hurricane
  destroyed his employers facilities. He had
  insurance that paid off his credit card bill
  since he had incurred involuntary job loss.
• Issues
• 1. Will this payment cause Jobless Dude to
  recognize income on his Form 1040 tax return?
• Conclusions
• 1.Debt repayment by an insurance company is
  taxable as income under Section 61(a)(12) and
  therefore must be recognized as income on Jobless
  Dudes Form 1040 tax return.

17

• Discussion of Reasoning and Authorities
• 1. Section 61(a) provides that gross income
  includes all income from whatever source
  derived unless specifically exempted. In
  addition, section 61(a)(12) specifically includes
  income from discharge of indebtedness as gross
  income. Since the 10,000 owed to the credit
  card companies is, in fact, debt, this repayment
  by the insurance company is considered a
  discharge of indebtedness and must be included in
  Jobless Dudes gross income.

18

• Discussion of Reasoning and Authorities
• The Code does allow income from discharge of
  indebtedness to be excluded from gross income in
  section 108(a). However, Jobless Dude did not
  declare bankruptcy, the indebtedness is not farm
  indebtedness, and the discharge is not qualified
  a real property business indebtedness. Finally,
  Jobless Dude does not qualify as insolvent, the
  final allowance for exclusion. Section 108(d)(3)
  defines insolvent as having an excess of
  liabilities over the fair market value of assets
  owned. Jobless Dude has no other debt and has
  substantial assets therefore, these exclusions
  do not apply and cannot be used to avoid
  recognizing the gross income.
• Finally, this issue was addressed in Bunker vs.
  Commissioner, T.C. 35 (2005). This case
  established that an individual has no basis in
  credit card liability. Therefore, the insurance
  payment was not a recovery or restoration of
  capital and thus, such payments are income.

19

• Memo to File
• Client Client
• Subject Insurance payoff of debt
• For Dr. Howard Godfrey
• Researched by Tax Student
• Date September 1, 2005

20

• Facts
• Our client recently lost his job when his
  employers facilities were destroyed by a
  hurricane. Client maintained insurance which
  paid off his 10,000 credit card liability due to
  the involuntary loss of his job. Client has no
  other debt and has substantial other assets.
  Client has asked us asked us for tax guidance
  concerning how to handle the insurance payment of
  his debt on his income tax return.
• Issues
• Is the payment of an individuals debts by an
  insurance company taxable income to the
  individual?

21

• Conclusions
• Debts paid by an insurance company on behalf of
  an individual are discharge of indebtedness
  income which is taxable income under Section
  61(a)(12).
• Discussion of Reasoning and Authorities
• Internal Revenue Code Section 61(a) defines gross
  income as "all income from whatever source
  derived," unless otherwise provided. The Supreme
  Court has consistently given this definition of
  gross income a liberal construction in
  recognition of the intention of Congress to tax
  all gains except those specifically exempted.
  Commissioner v. Glenshaw Glass Co., 348 U.S. 426,
  430 (1955) see also Roemer v. Commissioner, 716
  F.2d 693, 696 (9th Cir. 1983), revg. 79 T.C. 398
  (1982) (all realized accessions to wealth are
  presumed taxable income, unless the taxpayer can
  demonstrate that an acquisition is specifically
  exempted from taxation). In addition, I.R.C.
  61(a)(12) specifically provides that gross income
  includes income from discharge of indebtedness.
  In this case, Clients credit card debt has been
  paid by the insurance company, so this qualifies
  as discharge of indebtedness income. The
  discharge did not occur during a title 11 case,
  our client is not insolvent, the debt was not
  qualified farm nor qualified real property
  business indebtedness, so the exclusions of IRC
  108 do not apply.

22

• Conclusions
• Our client also cannot successfully contend that
  the insurance payments on his credit cards are
  analogous to insurance recovery amounts for
  damaged property, which benefits do not
  constitute gross income. Generally, the
  taxability of recovery payments depends upon the
  nature of the claim. Bunker v. Commissioner,
  T.C. Summary Opinion 2005-35 (2005). If the
  recovery represents damages for lost profits, the
  payment is considered income however, if the
  recovery represents a replacement of capital
  destroyed or damaged, the recovery does not
  constitute income to the extent the recovery does
  not exceed the basis of the damaged or destroyed
  property. State Fish Corp. v. Commissioner, 48
  T.C. 465, 473 (1967). In Clients case, he has no
  basis in his credit card liability. Therefore,
  the payment by the insurance company is not a
  recovery or restoration of capital, and therefore
  are taxable income.