Hamilton v. CIR, No. 19-9000 (10th Cir. 2020)
Annotate this CaseClaiming insolvency, taxpayer Vincent Hamilton sought to exclude nearly $160,000 in student loans that were forgiven from his taxable income. During the same tax year, however, he had received a non-taxable partnership distribution worth more than $300,000. His wife transferred those funds into a previously-unused savings account held nominally by their adult son. Using login credentials provided by their son, Mrs. Hamilton incrementally transferred almost $120,000 back to the joint checking account she shared with her husband. The Hamiltons used these funds to support their living expenses. In a late-filed joint tax return, they excluded the discharged student-loan debt on the theory that Mr. Hamilton was insolvent. In calculating his assets and liabilities, however, the Hamiltons did not include the funds transferred into the savings account. Had they done so, Mr. Hamilton would not have met the criteria for insolvency; and the couple would have owed federal income tax on the student-loan discharge. The Commissioner of Internal Revenue eventually filed a Notice of Deficiency, reasoning that the partnership distribution rendered Mr. Hamilton solvent, such that the Hamiltons were required to pay income tax on the cancelled student loan debt. debt. The Hamiltons petitioned for review from the Tax Court, which sustained both the deficiency and a significant late-filing penalty. Finding no reversible error, the Tenth Circuit affirmed the Tax Court's judgment.
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