No Debt Discharge Income Because Debt Still Outstanding and Being Repaid.

The petitioner founded a communications company (Summit) in 1996.  In 1998, the petitioner executed an employment agreement with another communications problem (SIC).  Under the agreement, the petitioner personally received a loan of $450,000 which he was to loan to Summit to support its operations.  Summit then began receiving large contracts from SIC which within two years amounted to 60 percent of Summit's revenue.  In 1998, the petitioner also received a $20,000 loan from SIC's parent company.  In 2000, the petitioner resigned from SIC to manage the growth of Summit.  The resignation triggered the repayment obligation on the SIC loan.  SIC did not demand repayment at that time and did not issue a Form 1099-C, and the petitioner also did not receive a Form 1099 from SIC's parent company.  In 2001, SIC received a large USDA loan to provide telecommunication services to rural areas.  Consequently, SIC's reliance on Summit reduced substantially, which impacted Summit negatively.  Summit filed bankruptcy in 2002 and was dissolved in 2009.  In 2005, the petitioner was rehired by SIC.  The IRS audited the petitioner's 2007 return and claimed that the $20,000 loan had been forgiven and needed to be reported in income.  The IRS also claimed that the SIC loan constituted discharge of indebtedness income that should have been reported on the 2007 return based on the fact that SIC had not taken collection action and the loan became due and before the period of limitations for collection expired.  The IRS thought that such inaction manifested an intention on the part of SIC or its parent corporation to forgive the SIC loan.  The court disagreed, noting that credible testimony indicated that SIC did not consider the loan forgiven and that the petitioner was currently repaying the loan and that Form 1099-C was not issued.  In addition, the expiration of the state limitations period was not conclusively an identifiable event as to when a debt has been discharged.  However, the $20,000 loan from SIC's parent was forgiven in 2007.  However, the court noted that the petitioner was insolvent in 2007 at the time the $20,000 loan was forgiven and was, therefore excludible under the insolvency exemption of I.R.C. Sec. 108(a)(1)(B).  However, the court held that the petitioner was not entitled to a bad debt deduction as a result of the Summit loan becoming worthless in 2009.  The court did not have jurisdiction to hear the claim because the year under review was 2007.  An accuracy-related penalty was not imposed.  Johnston v. Comr., T.C. Memo. 2015-91.