Edward B. Rood - Page 8

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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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