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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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