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OPINION
Petitioner contends that he did not have cancellation of
indebtedness income from his settlement with MBNA, because the
settlement reflected compromise of a disputed liability.
Petitioner testified at trial that he disputed the finance
charges on his account because of changing interest rates charged
by MBNA. Respondent contends that petitioner acknowledged as of
May 1996 a balance owing to MBNA and that the amount of
petitioner’s Mastercard account was always liquidated.
Section 61(a)(12) includes in the general definition of
gross income “income from discharge of indebtedness”. Respondent
relies on the discussion of this provision in Preslar v.
Commissioner, 167 F.3d 1323 (10th Cir. 1999), revg. T.C. Memo.
1996-543. In Preslar, the Court of Appeals for the Tenth
Circuit, to which our decision in this case is appealable,
examined the history of the discharge of indebtedness income rule
and the “contested liability” exception to recognition of
discharge of indebtedness income. The debt in Preslar was the
balance owing on a $1 million promissory note. The note had been
given to a bank by the taxpayers in connection with the purchase
of a ranch that was to be developed by the taxpayers. The bank
permitted the taxpayers to repay the loan by assigning the
installment sales contracts of purchasers of the developed
property to the bank at a discount. When the payee-bank became
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