Edward B. Rood - Page 19

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          settlement that has been made for some of the reasons advanced by           
          Caesar's in the instant case:                                               
                    On the other hand * * * [the debtor] may actually                 
               owe the debt; and yet * * * [the creditor], confronted                 
               with a denial of liability, may be willing to settle,                  
               saving the time and expense of litigation, by accepting                
               a much smaller payment than that actually owing.  Where                
               there are serious problems of proof or of                              
               collectibility, or when * * * [the creditor] is                        
               confronted with unusual policy considerations, he may                  
               even be willing to dismiss the suit without any                        
               payment.  In such situations it seems clear that * * *                 
               [the debtor] would thereby realize cancellation of                     
               indebtedness income subject to the “insolvency” and                    
               “gift” exceptions.[12]                                                 
                    The conclusion which must be reached is that the                  
               settlement of a disputed debt may or may not result in                 
               cancellation-type income.  The institution of a                        
               collection suit by a purported creditor does not                       
               establish that a debt exists or has existed, but                       
               essentially is only evidence that the plaintiff so                     
               contends; likewise, a defendant’s denial of liability                  
               does not establish that a debt does not exist or is no                 
               longer enforceable, but essentially is only evidence                   
               that the purported debtor so contends.  The terms of                   
               the agreement settling the litigation are of probative                 

          12                                                                          
               Neither exception is relevant in the instant case.                     
          Petitioner was not insolvent during 1988, nor has he established            
          any donative intent on the part of Caesar’s in settling his debt.           
          Moreover, although there is no express abolition of the gift                
          exception in sec. 108, the legislative history of the Bankruptcy            
          Tax Act of 1980, Pub. L. 96-589, 94 Stat. 3389, which amended               
          sec. 108, states, in the course of discussing provisions relating           
          to the realization of cancellation of indebtedness income arising           
          from contributions by a shareholder of debt to the capital of a             
          corporation, that ”it is intended that there will not be any gift           
          exception in a commercial context (such as a shareholder-                   
          corporation relationship) to the general rule that income is                
          realized on the discharge of indebtedness”.  H. Rept. 96-833, at            
          15 n.21 (1980); S. Rept. 96-1035, at 19 n.22 (1980), 1980-2 C.B.            
          620, 629.  Consequently, there is at least a question whether the           
          gift exception continues to be applicable to commercial                     
          transactions, such as the one in issue in the instant case.                 




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