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Petitioner was not insolvent during 1988. Petitioner did
not report the $255,000 written off by Caesar’s as income from
the cancellation of indebtedness on his 1988 Federal income tax
return.
OPINION
Section 61(a)(12) provides the general rule that gross
income includes income from the cancellation of indebtedness.
The amount of the income includable generally is the difference
between the face value of the debt and the amount paid in
satisfaction of the debt. Babin v. Commissioner, 23 F.3d 1032,
1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673. The income is
recognized in the year cancellation occurs. Montgomery v.
Commissioner, 65 T.C. 511, 520 (1975). A frequently cited
rationale for the rule is that the cancellation results in an
accession to income by effecting a freeing of assets previously
offset by the liability arising from the indebtedness. United
States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); Cozzi v.
Commissioner, 88 T.C. 435, 445 (1987). If, however, the
cancellation of all or part of a debt is made in settlement of a
dispute concerning the debt, no income from cancellation of
indebtedness arises.1 N. Sobel, Inc. v. Commissioner, 40 B.T.A.
1
We note that there is some question as to whether the
disputed debt rule applies only to an unliquidated debt, i.e.,
one the amount of which is undetermined, regardless whether the
debt is enforceable, Zarin v. Commissioner, 92 T.C. 1084, 1095-
(continued...)
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