George W. Earnshaw - Page 5




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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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