                         T.C. Memo. 2002-71



                       UNITED STATES TAX COURT



DALE A. RINEHART AND JEANA L. YEAGER, f.k.a. JEANA L. RINEHART,
                     ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20185-98, 15968-99,          Filed March 26, 2002.
                 15969-99, 7007-00.


     Frank C. Hider, for petitioners.

     Stephen W. Brower, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined deficiencies in and

penalties on petitioners’ Federal income taxes as follows:


     1
        Cases of the following petitioners are consolidated
herewith: Jeana L. Yeager, docket No. 15968-99; Dale A.
Rinehart, docket No. 15969-99; Jeana L. Yeager, docket No. 7007-
00.
                                   - 2 -

                                                  Penalty
     Docket No.        Year        Deficiency    Sec. 6662

         20185-98      1994         $46,894       $9,379
         15968-99      1995          29,264        5,853
         15969-99      1995          28,765        5,753
         15969-99      1996          53,869       10,774
          7007-00      1996          27,032        5,406

In Rinehart v. Commissioner, T.C. Memo. 2002-9, we addressed the

issue of whether Dale A. Rinehart’s (Mr. Rinehart) horse breeding

activity was an activity not engaged in for profit for 1994,

1995, and 1996.     The remaining issues for decision are:2   (1)

Whether petitioners had cancellation of indebtedness income (COD

income) for 1995; and (2) whether petitioners are liable for

penalties pursuant to section 6662(a).3

                              FINDINGS OF FACT

     We incorporate our findings in Rinehart v. Commissioner,

supra, herein by this reference.

     On June 21, 1991, Jeana L. Yeager (Ms. Yeager)4 signed a

loan application for $75,000 from Advanta Mortgage Corp. USA



     2
        The question of whether Jeana L. Yeager is entitled to
relief pursuant to sec. 66 or 6015 is moot because in Rinehart v.
Commissioner, T.C. Memo. 2002-9, we concluded that Mr. Rinehart
engaged in his horse breeding activity for profit.
     3
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     4
        We use the term “Ms. Yeager” for convenience only. The
Court makes no findings regarding petitioners’ marital status
during and after the years in issue.
                                - 3 -

(Advanta).   Ms. Yeager was listed as the borrower, and John L.

Babcock5 was listed as a coborrower.    Ms. Yeager listed her

address as 614 Sandydale Drive, Nipomo, California 93444 (the

California address).   Ms. Yeager and Mr. Babcock signed a note

dated June 21, 1991, in the amount of $75,000.    The interest rate

was listed as 13.35 percent.   Ms. Yeager obtained this loan to

take advantage of business opportunities related to Voyager.

     To secure the $75,000 loan, Advanta filed a Deed of Trust

dated June 21, 1991, with San Luis Obispo County, California,

recording a second mortgage on the property located at the

California address.    The deed of trust was signed by Ms. Yeager

and notarized.

     Sometime before May 1995, Advanta foreclosed on the property

securing the $75,000 loan.   In 1995, Advanta took title to the

property securing the $75,000 loan, sold the property securing

the $75,000 loan, and discharged the principal balance

outstanding on the $75,000 loan.

     Advanta issued a Form 1099-C, Cancellation of Debt, for 1995

to Ms. Yeager.   The Form 1099-C reported May 17, 1995, as the



     5
        At the time, Mr. Babcock was Ms. Yeager’s business
manager at Voyager Aircraft, Inc. (Voyager). Ms. Yeager became
involved with Voyager in an attempt to fly an airplane around the
world without stopping or refueling. In December 1986, Richard
G. Rutan and Ms. Yeager accomplished this feat, an aviation
milestone, and as a result the airplane used to accomplish it
hangs in the Smithsonian Air and Space Museum.
                               - 4 -

date of the cancellation of debt and $21,975 as the amount of

debt canceled.

     In or about January 1996, Advanta mailed the Form 1099-C to

Ms. Yeager at her last known address.    The address listed on Ms.

Yeager’s Form 1099-C was the California address.   At the time

Advanta mailed the Form 1099-C, Ms. Yeager lived in Texas.   Ms.

Yeager did not receive the Form 1099-C and was unaware of the

Form 1099-C until she was contacted by the IRS during the audit

of her 1994, 1995, and 1996 tax years.

     In February 1996, Ms. Yeager filed for bankruptcy.

                              OPINION

I.   Cancellation of Indebtedness

     A.   Burden of Proof

     Generally, the taxpayers bear the burden of proof.6   Rule

142(a)(1).   As a preliminary matter, petitioners argue that the

burden of proof is on respondent to establish that petitioners

had COD income because respondent issued notices of deficiency

based solely upon a Form 1099 issued by Advanta.   Petitioners

argue that Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.

1991), revg. T.C. Memo. 1990-68, and 988 F.2d 27 (5th Cir. 1993),

revg. T.C. Memo. 1992-99, places the burden on respondent.

     Petitioners make this argument for the first time on brief.


     6
        Sec. 7491 is not applicable to these cases.   Rinehart v.
Commissioner, T.C. Memo. 2002-9, n.20.
                               - 5 -

Generally, we will not consider issues that are raised for the

first time at trial or on brief.   Foil v. Commissioner, 92 T.C.

376, 418 (1989), affd. 920 F.2d 1196 (5th Cir. 1990); Markwardt

v. Commissioner, 64 T.C. 989, 997 (1975).   Accordingly, we shall

not consider whether to place the burden of proof upon

respondent.7

     B.   General Rule

     Generally, a taxpayer must recognize income from the

discharge of indebtedness.   Sec. 61(a)(12); United States v.

Kirby Lumber Co., 284 U.S. 1 (1931).   The documentary evidence in

addition to the Form 1099-C and the testimony of a representative

of Advanta established:   (1) Ms. Yeager borrowed $75,000 from

Advanta; (2) she did not repay the $75,000 loan; (3) Advanta

foreclosed on the property securing the $75,000 loan; (4) Advanta

sold the property securing the $75,000 loan; (5) Advanta

discharged the indebtedness of Mr. Babcock and Ms. Yeager; and

(6) Advanta issued Ms. Yeager a Form 1099-C reporting the amount

of canceled debt as $21,975.   On the basis of the evidence in the

record, we conclude that in 1995 Ms. Yeager had $21,975 of COD

income.




     7
        The resolution of whether Ms. Yeager had COD income does
not depend on which party has the burden of proof. We resolve
this issue on the basis of a preponderance of evidence in the
record.
                                 - 6 -

     C.     Nonreceipt of Form 1099

     Petitioners claim that because Ms. Yeager did not receive

the Form 1099-C, Ms. Yeager did not realize COD income.    We

disagree.    “The moment it becomes clear that a debt will never

have to be paid, such debt must be viewed as having been

discharged.”    Cozzi v. Commissioner, 88 T.C. 435, 445 (1987).

The nonreceipt of a Form 1099 does not convert taxable income

into nontaxable income.     Vaughan v. Commissioner, T.C. Memo.

1992-317, affd. without published opinion 15 F.3d 1095 (9th Cir.

1993).

     Advanta prepared a Form 1099-C reporting May 17, 1995, as

the date it canceled Ms. Yeager’s indebtedness and $21,975 as the

amount of debt canceled.    Accordingly, we hold that Ms. Yeager

realized the COD income in 1995.

     D.     Insolvency

     Petitioners also claim that Ms. Yeager was insolvent when

Advanta forgave the debt.    Petitioners assert that Ms. Yeager had

liabilities close to $32,000 from creditors’ claims (other than

Advanta) while at the same time she had no more than $1,000 in

assets and earned only $400 a month.     Petitioners also argue that

they were not married at the time of the cancellation of

indebtedness; therefore, Mr. Rinehart’s assets are irrelevant in

determining whether Ms. Yeager was insolvent.

     The Internal Revenue Code provides an exception to the
                                 - 7 -

recognition of COD income in cases where the discharge occurs

when the taxpayer is insolvent.    Sec. 108(a)(1)(B); see also

Babin v. Commissioner, 23 F.3d 1032, 1035 (6th Cir. 1994), affg.

T.C. Memo. 1992-673.    For purposes of section 108, “insolvent”

means the excess of liabilities over the fair market value of

assets.   Sec. 108(d)(3).   Whether the taxpayer is insolvent shall

be determined on the basis of the taxpayer’s assets and

liabilities immediately before the discharge.    Id.

     Texas is a community property State.    Tex. Fam. Code Ann.

secs. 3.001-3.309 (Vernon 2002); Lange v. Phinney, 507 F.2d 1000,

1005 (5th Cir. 1975).    Thus, if petitioners were married, we must

include Ms. Yeager’s share of community assets and liabilities in

determining whether she was insolvent.    We need not decide

petitioners’ marital status for 1995 for Federal income tax

purposes, however, because the evidence fails to establish the

amount of Ms. Yeager’s individual assets and liabilities as of

the date of the discharge of indebtedness, in 1995, by Advanta.

     Petitioners’ figure of $32,000 in liabilities is taken from

the bankruptcy petition filed in February 1996.    This figure is

not from the same year as, nor immediately before, the

cancellation of indebtedness.

     Petitioners also rely on their own testimony to establish

that Ms. Yeager was insolvent.    The Court is not required to

accept petitioners’ unsubstantiated testimony.    Wood v.
                               - 8 -

Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.

593 (1964).   We found petitioners’ testimony on this issue to be

general, vague, conclusory, and/or questionable in certain

material respects.   Under the circumstances presented here, we

are not required to, and do not, rely on petitioners’ testimony

to establish whether Ms. Yeager was insolvent.     Lerch v.

Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989), affg. T.C.

Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688, 689-690

(9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159; Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986).     Accordingly, we conclude

that at the time of the discharge of indebtedness Ms. Yeager was

not entitled to the benefits provided by section 108(a)(1)(B).

     E.   Mr. Rinehart’s Liability Regarding the Canceled Debt

     In the notice of deficiency issued to Mr. Rinehart for 1995,

respondent determined “in accordance with community property

laws” that Mr. Rinehart was liable for $10,987 of COD income.

Petitioners claim that pursuant to Texas law Ms. Yeager’s COD

income was not income to Mr. Rinehart as the cancellation of

indebtedness related to Ms. Yeager’s separate property and did

not give rise to community income.     Again, we need not decide

petitioners’ marital status for 1995 for Federal income tax

purposes because, although respondent made an adjustment in Mr.

Rinehart’s separate notice of deficiency for 1995 regarding Ms.

Yeager’s COD income, in his briefs respondent did not address the
                                - 9 -

issue of Mr. Rinehart’s liability for Ms. Yeager’s COD income.

      Where the Commissioner fails to address an issue in his

opening or reply brief, we may deem that he waived that issue.

Levert v. Commissioner, T.C. Memo. 1989-333, affd. without

published opinion 956 F.2d 264 (5th Cir. 1992).    Therefore, we

conclude that respondent has abandoned this issue.    Petzoldt v.

Commissioner, 92 T.C. 661, 683 (1989).

II.   Section 6662 Penalties

      Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

due to negligence or disregard of rules or regulations.8     Sec.

6662(b).    Section 6664(c)(1) provides that no accuracy-related

penalty shall be imposed with respect to any portion of an

underpayment if it is shown that there was reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion.    The decision as to whether the taxpayer

acted with reasonable cause and in good faith depends upon all

the pertinent facts and circumstances.    Sec. 1.6664-4(b)(1),

Income Tax Regs.

      With regard to the horse breeding activity, we previously

concluded that Mr. Rinehart engaged in the activity with the

intent of making a profit within the meaning of section 183.


      8
          Sec. 7491(c) is not applicable to these cases.   See supra
note 6.
                             - 10 -

Rinehart v. Commissioner, T.C. Memo. 2002-9.     Respondent conceded

that if the Court determined the horse breeding activity was

engaged in for profit, then petitioners substantiated the

expenses deducted for the horse breeding activity.    Accordingly,

there is no underpayment of tax attributable to the horse

breeding activity and thus no accuracy-related penalty associated

with the horse breeding activity.

     With regard to the COD income, we do not believe imposition

of the accuracy-related penalty is appropriate.    Ms. Yeager did

not receive a Form 1099 reporting the COD income.    She was

unaware of the Form 1099-C until she was contacted by the IRS

during the audit of her 1994, 1995, and 1996 tax years.

Accordingly, we hold the she is not liable for the accuracy-

related penalty attributable to the COD income.

     Petitioners failed to present evidence to establish that

they acted with reasonable cause and in good faith with regard to

any of the other issues, including those they conceded.9

Accordingly, we hold that petitioners are liable for the

accuracy-related penalties as to those issues.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not



     9
        Petitioners make assertions in their briefs regarding
these other issues; however, assertions on brief are not
evidence. Rule 143(b).
                             - 11 -

mentioned above, we conclude they are irrelevant or without

merit.

     To reflect the foregoing,

                                        Decisions will be entered

                                   under Rule 155.
