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Walker v. Commissioner, 88 F.2d 170 (5th Cir. 1937), affg. White
v. Commissioner, 34 B.T.A. 424 (1936); Shannon v. Commissioner,
T.C. Memo. 1993-554. For example, Walker v. Commissioner, supra
at 171, involved a settlement entered in 1927 whereby the
creditor agreed to cancel the balance of a debt after payments
totaling a prescribed amount were made by the debtor. This
payment level was reached in 1930, and the discharge was held to
have occurred in that year. See id.
In contrast, if an arrangement effects a present
cancellation of one liability but imposes a replacement
obligation, the mere chance of some future repayment does not
delay income recognition where the replacement liability is
highly contingent or of a fundamentally different nature. See
Carolina, Clinchfield & Ohio Ry. v. Commissioner, 82 T.C. 888
(1984), affd. 823 F.2d 33 (2d Cir. 1987); Zappo v. Commissioner,
81 T.C. 77 (1983). Specifically, we stated in Zappo v.
Commissioner, supra at 88, that “A note or obligation will not be
treated as a true debt for tax purposes when it is highly
unlikely, or impossible to estimate, whether and when the debt
will be repaid.” We explained that “highly contingent
obligations should not be treated in pari materia with their more
conventional counterparts”, and we further found that “this
reasoning applies with equal force to the issue of refinancing an
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