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value (though not conclusive) in determining the
relative merits of the two parties’ positions--for
example, the payment of no or only nominal
consideration by the purported debtor tends to support
the conclusion that at least one of its defenses is
well taken. [Id.13].
Consequently, although, given the fact that Caesar’s settled
with petitioner, one might infer the existence of a dispute
concerning the debt, and the amount of the settlement might be an
indicator of the relative merits of their respective positions,
such circumstances are not conclusive of whether a debt is
disputed in good faith for purposes of deciding whether or not a
debtor has realized income from the cancellation of indebtedness
13
The court in Exchange Sec. Bank v. United States, 345 F.
Supp. 486, 491 (N.D. Ala. 1972), revd. on other grounds 492 F.2d
1096 (5th Cir. 1974), also stated that “the trial court in a tax
case involving alleged cancellation-type income must, it appears,
determine the underlying, critical facts, e.g., the actual amount
(if any) of the debt.” We note that, in Zarin v. Commissioner,
916 F.2d at 115-116, the Court of Appeals for the Third Circuit
held that a good faith dispute between a lender and borrower
would cause a settlement not to give rise to an accession to
income from cancellation of indebtedness. The Board of Tax
Appeals also found that settlement of a dispute concerning a debt
did not give rise to income from the cancellation of indebtedness
where litigation concerning the taxpayer’s liability was bona
fide, and, because of the settlement of the litigation, it could
not be said whether or not the litigation would have established
the liability. N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263,
1265 (1939). Thus, the Board seems to have adopted a similar
standard in deciding whether the disputed debt rule applies to a
settlement.
Notwithstanding the correct standard to be applied, however,
petitioner cannot prevail because he has not established either
that the actual amount of his debt was less than the amount
Caesar’s claimed that he owed or that there was a good faith
dispute concerning the amount.
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