Administracion

homas Tran had credit cards issued by U.S Bank and Wells Fargo Bank. In 2007, he engaged a debt resolution company to help him reduce or discharge his credit card debt. In 2008, the debt resolution company was successful in negotiations and U.S. Bank agreed to write off $2,798 and Wells Fargo agreed to write off $3,955 of Thomas's credit card balance. Thomas incurred and paid $2,343 to the debt resolution company for its services.

For 2008, both U.S. Bank and Wells Fargo issued Thomas a Form 1099-C that reported this cancellation of debt (COD) income. Thomas timely filed his 2008 Federal income tax return; however, he failed to report any of the COD income from U.S. Bank and Wells Fargo. Upon audit, the IRS increased his taxable income by $6,753 and disallowed any deduction for the $2,343 paid to the debt resolution company.

Section 61 (a) (12) specifically includes COD in gross income unless it can be excluded under another code section. Section 108 provides certain situations where a taxpayer can exclude COD from gross income. Both Thomas and the IRS agreed that none of the exclusions contained in (108) applied and the COD income was taxable.

However, Thomas and the IRS disagreed as to the deductibility of the fees paid to the debt resolution company. While they did agree that the fees paid to the debt resolution party were not a merchant discount and did not qualify as an exclusion from or offset to the $6,753 of COD income that was realized, they disagreed about the deductibility under (212) (1).

Under (212) (1), a taxpayer is allowed a deduction for ordinary and necessary expenses paid during the year for the production or collection of income, subject to the two percent of adjusted gross income floor. Thomas argued that the debt resolution fees of $2,343 were

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