and the discharge was held to have occurred in that year. See id. In contrast, if an arrangement effects a present cancellation of one liability but imposes a replacement obligation, the mere chance of some future repayment does not delay income recognition where the replacement liability is highly contingent or of a fundamentally different nature. See Carolina, Clinchfield & Ohio Ry. v. Commissioner, 82 T.C. 888 (1984), affd. 823 F.2d 33 (2d Cir. 1987); Zappo v. Commissioner, 81 T.C. 77 (1983). Specifically, we stated in Zappo v. Commissioner, supra at 88, that "A note or obligation will not be treated as a true debt for tax purposes when it is highly unlikely, or impossible to estimate, whether and when the debt will be repaid." We explained that "highly contingent obligations should not be treated in pari materia with their more conventional counterparts", and we further found that "this reasoning applies with equal force to the issue of refinancing an indebtedness." Id. at 89. In addition, we described the manner in which this precept was to be employed in a discharge setting, as follows: When an obligation is highly contingent and has no presently ascertainable value, it cannot refinance or substitute for the discharge of a true debt. The very uncertainty of the highly contingent replacement obligation prevents it from reencumbering assets freed by discharge of the true debt until some indeterminable date when the contingencies are removed. In a word, there is no real continuation of indebtedness when a highly contingent obligation is substituted for a true debt. Consequently, the rule in Kirby Lumber applies, and gain is realized to the extent the taxpayer is discharged from the initial indebtedness. [Id.] The original debt in Zappo v. Commissioner, supra at 90, had been characterized by a fixed amount, a stated rate of interest, and a due date certain. The replacement liability was for an amount that could not be ascertained until the end of 5 years, did not bear interest, and would be credited with amounts paid by a third party. See id. In those circumstances, we held that the foregoing rule precluded treatment of the new obligation as replacement indebtedness. See id.; see also Carolina, Clinchfield & Ohio Ry. v. Commissioner, supra. Turning to the matter at bar, we believe that the precedent discussed above counsels a finding that petitioners' indebtedness to FmHA was discharged in 1996, for the simple reason that whether and when petitioners would ever be required to make any further payments to FmHA rested totally within their own control. If petitioners chose to sell their property within 10 years from the inception of the net recovery buyout recapture agreement, then in accordance with the terms of that agreement, petitioners could be required to repay part or all of the $177,722 written off by FmHA. If petitioners chose not to dispose of their property, then, of course, nothing further would be due. Petitioners' obligation was thus "highly contingent" in every sense of the word. This state of affairs fits perfectly within the precept formulated in Zappo v. Commissioner, supra, that a highly contingent obligation will not be treated in pari materia with a more conventional counterpart. Petitioners' initial debt to FmHA, the "conventional counterpart" in this case, was fixed in amount, bore a stated rate of interest, and required periodic payments. In contrast, petitioners' liability under the recapture agreement had no certain amount, was not interest bearing, and mandated no definite payments. An enforceable financial obligation may in fact never materialize at all. Faced with these differences, we cannot reasonably view the latter alleged debt as a mere substitute for the former. We are convinced that the rationale of United States v. Kirby Lumber Co., 284 U.S. 1 (1931), is particularly applicable here where the recapture agreement leaves petitioners in complete control of their assets and free to arrange their affairs so that none of their property's value need ever be delivered to FmHA. We hold that petitioners received discharge of indebtedness income in 1996 when FmHA wrote off $177,772 of petitioners' outstanding loan obligation. II. Social Security Benefits The second question raised by this litigation is whether a portion of the Social Security benefits received by petitioners is includable in their gross income. Although this issue is largely computational, we address it briefly to ensure lucidity. The parties stipulated that petitioners received such benefits in the amount of $3,420. Of this total, respondent contends that 85 percent, or $2,907, must be reported as gross income. Petitioners have offered no argument related to their Social Security benefits. Income tax treatment of Social Security benefits is governed by section 86. Section 86 applies to require inclusion of payments if the taxpayer's adjusted gross income, with certain modifications not relevant here, plus one-half of the Social Security benefits received, exceeds a specified base amount. See sec. 86(b). This base amount, in the case of taxpayers filing a joint return, is $32,000. See sec. 86(c)(1)(B). Since petitioners reported adjusted gross income of $8,466 and we have just held that they must include an additional $177,772 from discharge of indebtedness, the base amount threshold is clearly exceeded. In general then, section 86(a)(1) provides that gross income includes the lesser of: (1) One-half of the Social Security benefits received during the year; or (2) one-half of the excess of the sum of (a) modified adjusted gross income plus (b) onehalf of the Social Security benefits, over the base amount. The includable percentage is increased, however, if modified adjusted gross income plus one-half of the Social Security benefits exceeds an adjusted base amount of, for a joint return, $44,000. See sec. 86(a)(2), (c)(2)(B). Accordingly, petitioners are subject to the greater inclusion, which, on these facts, would be calculated at 85 percent of the Social Security benefits received. See sec. 86(a)(2). We therefore sustain respondent's determination that $2,907, 85 percent of the stipulated $3,420 in Social Security benefits, must be included in petitioners' gross income for 1996. III. Accuracy-Related Penalty Subsection (a) of section 6662 imposes an accuracy-related penalty in the amount of 20 percent of any underpayment that is attributable to causes specified in subsection (b). Among the causes so enumerated is any substantial understatement of income tax. See sec. 6662(b)(2). A "substantial understatement" is defined in section 6662(d)(1) to exist where the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return for the taxable year or $5,000. For purposes of this computation, the amount of the understatement is reduced to the extent attributable to an item: (1) If there existed substantial authority for the taxpayer's treatment of the item, or (2) if the relevant facts affecting the treatment of the item were adequately disclosed on the taxpayer's return or an attached statement, and there was a reasonable basis for the taxpayer's treatment of the item. See sec. 6662(d)(2)(B). An exception to the section 6662(a) penalty is set forth in section 6664(c)(1) and reads: "No penalty shall be imposed under this part with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion." The taxpayer bears the burden of establishing that this reasonable cause exception is applicable, as respondent's determination of an accuracyrelated penalty is presumed correct. See Rule 142(a). Regulations interpreting section 6664(c) state: The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. *** Generally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability. *** [Sec. 1.6664-4(b)(1), Income Tax Regs.] Applying these principles to the matter at hand, we are constrained to rule that petitioners have failed to meet their burden of showing the section 6662(a) penalty inappropriate here. Again, petitioners have offered no discussion or argument on this issue. Petitioners reported on their 1996 return a tax liability of zero and disclosed neither the cancellation of debt income for which they received a Form 1099-C nor their Social Security payments. Based on our holdings above, however, they in fact owe taxes for 1996 well in excess of the level constituting a substantial understatement. Furthermore, none of the avenues of relief provided in the statutory text is open to petitioners. There exists no substantial authority for their complete failure to report or disclose, so the amount of their understatement is not subject to reduction under section 6662(d)(2)(B). Additionally, due to the absence of explanation or evidence by petitioners on this issue, we lack any grounds upon which to conclude that their treatment was a product of reasonable cause and good faith for purposes of the section 6664(c) exception. Petitioners therefore are liable for the accuracy-related penalty. To reflect the foregoing, Decision will be entered for respondent. FPL GROUP, INC. AND SUBSIDIARIES, PETITIONER v. RESPONDENT Docket No. 5271-96. Filed February 1, 2001. On its consolidated Federal income tax returns for the years in issue, F claimed a credit for Federal taxes on fuels. F now seeks credits in addition to amounts claimed on F's original Federal income tax returns. R argues that the so-called "one claim" rule contained in sec. 6427(i)(1), I.R.C., acts as a bar to F's additional claims for credit under sec. 34, I.R.C. Held, F is not barred by the so-called "one claim" rule of sec. 6427(i)(1), I.R.C., from obtaining additional credits under sec. 34, I.R.C. Robert Thomas Carney, for petitioner. James F. Kearney, for respondent. OPINION RUWE, Judge: This matter is before the Court on respondent's motion for partial summary judgment filed pursuant to Rule 121.1 The sole issue presented is whether petitioner is barred by the so-called "one claim" rule of section 6427(i)(1) from obtaining a credit under section 34 for amounts of Federal excise taxes paid on fuels. Background FPL Group, Inc., is a corporation organized and existing under the laws of the State of Florida with its principal office located in Juno Beach, Florida. FPL Group, Inc. & Subsidiaries (petitioner) filed consolidated Federal income tax returns for the years 1988 through 1992. Petitioner attached to each return a Form 4136, Computation of Credit for Federal Tax on Fuels. Form 4136 is used to claim credit for Federal excise tax paid on fuels sold or used during the period 1 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. |