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EDWARD B. ROOD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRood v. CommissionerDocket No. 3366-94.
United States Tax Court T.C. Memo 1996-248; 1996 Tax Ct. Memo LEXIS 262; 71 T.C.M. (CCH) 3125;May 29, 1996, Filed*262 Decision will be entered for respondent.
Edward B. Rood, pro se. Monica J. Howland, for respondent.WELLS, JudgeWELLSMEMORANDUM FINDINGS OF FACT AND OPINION
WELLS,
Judge : Respondent determined a deficiency of $ 60,457 in petitioner's 1988 Federal income tax. The only issue presented in the instant case is whether petitioner realized income from the cancellation of an allegedly disputed gambling debt written off by a casino. Unless otherwise indicated, all section references are to the Internal Revenue Code as in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.FINDINGS OF FACT
Some of the facts and the exhibits have been stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated herein by reference and are found accordingly.
During 1988 and when the petition in the instant case was filed, petitioner resided in Tampa, Florida.
Petitioner is an attorney who was recognized in 1991 for 50 years of membership in the Florida Bar. He is a former president of the Association *263 of Trial Lawyers of America, the Tampa and Hillsborough County Bar Associations, the Florida Academy of Trial Lawyers, and the Junior Bar of the State of Florida.
Prior to 1985, petitioner maintained a line of credit at Caesar's Palace (Caesar's or the casino), a casino in Las Vegas, Nevada, where he gambled.
To draw on a line of credit, typically, a customer would sign the credit instrument given in exchange for chips (marker), in the gambling pit or at the cashier's cage in the casino. A marker could be presented to a customer's bank by the casino for payment in the same manner as a check. If a customer wished to allow another to gamble on the customer's credit, the customer would sign the marker. If the gambler won money gambling on credit, he or she would be asked to redeem the marker in the pit, if it were still there. Otherwise, when the gambler sought to cash the chips won, the casino cashier would check to see whether there was a balance due for credit extended by the casino, and the gambler would be expected to apply the chips against the balance at that time.
When a payment is made on a customer's account at the casino cage, it is the casino's practice to give the payor*264 a numbered receipt, a duplicate of which is kept in a receipt book and another duplicate of which is kept in the IOU envelope for the customer's account, in which Caesar's also files the customer's markers and correspondence. It is also Caesar's practice to record all contacts with a customer concerning the account on the IOU envelope. Receipts are consecutively numbered. A payment made that did not appear to have been credited to a customer's account could be traced through the receipt book.
Petitioner incurred gambling debts at Caesar's. On November 23, 1984, Caesar's extended $ 110,000 of credit to petitioner. Caesar's generally expected payment of the outstanding balance of petitioner's account at the end of one trip to the casino at the time of his next trip, holding the account up to 60 days. During at least January, February, and March of 1985, Caesar's repeatedly contacted petitioner concerning payment of the debt, which Caesar's stated was due March 21, 1985. Petitioner informed Caesar's that he would pay the debt during his next trip to the casino. The debt was paid by cash and personal check on May 4, 1985. On May 5, 1985, Caesar's extended $ 110,000 of credit to petitioner. *265 On that date, a payment of $ 80,000 was made by personal check. On May 6, 1985, Caesar's extended an additional $ 80,000 of credit to petitioner. On that date, a payment of $ 80,000 was made by personal check drawn on a business account. On May 7, 1985, Caesar's extended additional credit of $ 80,000 to petitioner. Caesar's also paid petitioner's airfare for the May 1985 trip.
On October 11, 1985, a payment of $ 110,000 was made on petitioner's account by personal check. On October 12, 1985, Caesar's extended credit of $ 85,000 to petitioner. On that date, a payment of $ 75,000 was made on petitioner's account by personal check. On October 13, 1985, Caesar's extended $ 240,000 of credit to petitioner. Caesar's paid petitioner's airfare for his October 1985 trip to the casino.
Beginning no later than November 1985, Caesar's repeatedly contacted petitioner concerning repayment of the amounts owed. During October, November, and December 1985, the $ 110,000 and $ 75,000 checks were deposited by Caesar's, returned, redeposited, and returned again because of either a missing endorsement or insufficient funds. Caesar's posted the check for $ 110,000 as returned on December 9, 1985, and*266 the check for $ 75,000 as returned on December 10, 1985, and increased the balance owed by petitioner from $ 250,000 to $ 435,000. That balance was attributable to credit extended by Caesar's prior to December 1985. When informed of the returns of the checks, petitioner promised to make arrangements to clear them and, subsequently, to send new checks. In the course of a contact with Caesar's concerning the returned check for $ 110,000, petitioner also inquired when the $ 250,000 balance of his account was due, and Caesar's informed him that it was due January 12, 1986. On December 23, 1985, Caesar's received a check for $ 110,000, which was returned due to insufficient funds on January 15, 1986.
During 1986, petitioner made the following payments on his account:
Date Amount May 13, 1986 $ 25,000 Aug. 11, 1986 10,000 Dec. 3, 1986 10,000 The IOU envelope for petitioner's account sets forth the following notation with respect to a contact with petitioner on January 8, 1987: "Got him [petitioner] straightened out about 25M pmt [payment] which we rec back in
5/13/86 --verified balance & pmts [payments] made & he agrees". Caesar's sent petitioner an account statement *267 dated February 4, 1987, informing him that its executive committee had approved a lump-sum settlement in a reduced amount and inviting him to call its account representative for details. During 1987 and 1988, petitioner made payments on his account as follows:Date Amount Apr. 2, 1987 $ 5,000 May 27, 1987 5,000 July 16, 1987 5,000 Aug. 22, 1987 5,000 Oct. 27, 1987 5,000 Dec. 29, 1987 5,000 Mar. 13, 1988 5,000 In statements addressed to petitioner acknowledging receipt of the foregoing payments or setting forth the outstanding balance of his account, Caesar's requested that petitioner make monthly payments of between $ 5,000 and $ 10,000 to enable the casino to continue to hold his account and reminding him that its settlement offer was still open. In the statement dated March 15, 1988, Caesar's informed petitioner that it could not retain accounts indefinitely and that a 50-percent lump-sum settlement previously presented to petitioner was open to discussion.
By March 1988, $ 80,000 of petitioner's $ 435,000 debt to the casino had been repaid, leaving a balance of $ 355,000, according to the casino's records. A letter dated April 20, 1988, from Caesar's general *268 counsel to petitioner stated that the casino required petitioner to pay his account in full immediately and that, if he did not contact Caesar's account representative within 15 days, the casino would turn petitioner's account over to a law firm or a collection agency to institute legal proceedings against him if necessary. The letter further stated that (1) any suit commenced against petitioner would be filed in Nevada and (2) once judgment was obtained against petitioner, Caesar's would then have the judgment enforced against him by the courts of his home State. It was Caesar's usual practice to proceed in this manner in the event a lawsuit was instituted against a debtor.
A letter dated May 5, 1988, from Caesar's account representative to petitioner stated that the casino would accept a lump sum settlement of $ 142,000 in payment of petitioner's account, provided payment was made prior to June 5, 1988. Petitioner and the casino continued to negotiate a settlement after that offer. Petitioner subsequently signed an allowance receipt that was received by Caesar's on July 18, 1988, that requested $ 255,000 be written off his account balance to induce him to make payment on the account. *269 In accordance with an agreement between Caesar's and petitioner, petitioner paid Caesar's $ 100,000 by check dated June 29, 1988, that was received by the casino on September 2, 1988.
Caesar's wrote off the $ 255,000 balance of petitioner's account in September 1988 and noted in its records that (1) no attempt should be made to collect that amount should petitioner return to the casino to gamble and (2) no credit would be extended to petitioner in the future due to the settlement.
Petitioner retained no records of his contacts with Caesar's concerning the repayment of his debts to the casino.
Petitioner was not insolvent during 1988. Petitioner did not report the $ 255,000 written off by Caesar's as income from the cancellation of indebtedness on his 1988 Federal income tax return.
OPINION
Section 61(a) (12) provides the general rule that gross income includes income from the cancellation of indebtedness. The amount of the income includable generally is the difference between the face value of the debt and the amount paid in satisfaction of the debt.
Babin v. Commissioner , 23 F.3d 1032">23 F.3d 1032T.C. Memo. 1992-673 .*270 The income is recognized in the year cancellation occurs.Montgomery v. Commissioner , 65 T.C. 511">65 T.C. 511United States v. Kirby Lumber Co. , 284 U.S. 1">284 U.S. 1Cozzi v. Commissioner , 88 T.C. 435">88 T.C. 435N. Sobel, Inc. v. Commissioner , 40 B.T.A. 1263">40 B.T.A. 1263, 1265 (1939)Exchange Sec. Bank v. United States , 345 F. Supp. 486">345 F. Supp. 486492 F.2d 1096">492 F.2d 1096 (5th Cir. 1974); see alsoColonial Sav. Association v. Commissioner , 85 T.C. 855">85 T.C. 855854 F.2d 1001">854 F.2d 1001 (7th Cir. 1988). Settlement in such circumstances does not occasion a freeing of*271 assets and accession to income.N. Sobel, Inc. v. Commissioner, supra at 1265Petitioner, relying on
Zarin v. Commissioner , 916 F.2d 110 (3d Cir. 1990)92 T.C. 1084">92 T.C. 1084 (1989), claims that he disputed his debt to Caesar's, that his payments to Caesar's were in settlement of the dispute, and that therefore he realized no income upon the cancellation of the $ 255,000 that Caesar's claimed it was owed by petitioner. *273 have personally lost $ 80,000 gambling at Caesar's during the tournament.Petitioner claims that, from the time Caesar's began attempting to collect from him, he had a "running telephone dispute" with Caesar's because of the foregoing events, but he neither put his claims in writing nor attempted to obtain statements from the tournament gamblers to prove his allegations to Caesar's. *274 he never heard specifically what had occurred at the cage, petitioner claims that Caesar's started to send him letters concerning settlement of his account soon thereafter. Petitioner asserts that Caesar's must have known or thought it probable that a cage employee had mishandled the chips and that Caesar's settled for that reason. Petitioner contends that he owed Caesar's only $ 180,000, the amount that he repaid, but petitioner offers no evidence that directly corroborates his testimony that he disputed his debt to Caesar's. Petitioner, however, did offer the testimony of a witness who corroborated his version of some of the events occurring at the time of the golf tournament.
After considering the record in the instant case, however, we conclude that petitioner has not established the factual predicate for the alleged dispute between himself and Caesar's concerning the amount of his debt to the casino; namely, the*275 use of his credit by others during December 1985 and the failure of the casino to record repayments by those persons. The records of the casino in evidence concerning petitioner's account show that the extensions of credit that created the debts the casino sought to collect from petitioner occurred during May and October of 1985, not during December of that year as petitioner claims. *276 Moreover, nothing in those records supports petitioner's contention that he incurred a debt to Caesar's of $ 80,000 during the December 1985 tournament due to gambling losses, which losses formed the basis for a portion of the debt that he acknowledged that he owed Caesar's. As noted above, Caesar's records show no new debt arising during December 1985. In light of petitioner's claims, we are nonplussed by the failure of those records to even indicate that petitioner made a trip to Caesar's during December 1985. Thus, as far as Caesar's records are concerned, the payments made by petitioner were made with respect to liabilities arising in May and October 1985, *277 Furthermore, there is nothing in the records that indicates that petitioner communicated to Caesar's his dispute concerning the amount of the debt on the grounds he advanced at trial. According to the testimony of the representative from Caesar's, it is Caesar's policy to record all contacts with a debtor on the IOU envelope for the debtor's account. The contacts recorded on the IOU envelope for petitioner's account do not contain any reference to any of the circumstances forming the basis of petitioner's alleged dispute with the casino. Instead, the contacts recorded on the IOU envelope simply chronicle the casino's inquiries as to when payments would be made and its difficulties with collecting payment from petitioner. One contact record dated January 8, 1987, notes that Caesar's verified with petitioner both the balance of petitioner's account and the payments that had been made and that petitioner agreed with them. The contact record entry is evidence standing in direct contrast to petitioner's claim that he disputed the amount he owed the casino.
It seems likely that, if petitioner did not believe that he owed the full amount Caesar's claimed, he would have told one or more*278 of the account representatives who contacted him and that his claim, which involved an allegation of serious wrongdoing by a casino employee, would have been noted on the IOU envelope during the more than 2-1/2 years that Caesar's attempted to collect the debt. Petitioner claims that, because the casino accepted his word on the matter, he made no effort to prove his claim concerning the repayments from the tournament gamblers by, for instance, obtaining statements from them or showing the casino the receipts they apparently received from the casino cage when chips were cashed. However, in the records of Caesar's that are in evidence, there is no indication of any such acceptance. Petitioner claims that neither he nor the casino wanted to put anything concerning the dispute in writing prior to the making of settlement offers, but petitioner offers no plausible explanation for such a desire.
Moreover, it seems to us that petitioner readily could have resolved any dispute by presenting the casino with evidence of payment, such as the receipts apparently received by the tournament gamblers, rather than conducting a "running telephone dispute" with the casino that lasted over 2-1/2 years. *279 Instead, petitioner testified that although the players received "slips of paper" when they returned chips to the cage, he did not "remember what happened to them or why they would have been important." In light of petitioner's legal background, we find curious petitioner's plea of ignorance as to the importance of such evidence as a matter of proof of his claim.
Petitioner also claimed to have dealt, by telephone, with Mr. Jones, Caesar's collection manager, and denied dealing with other Caesar's employees whose names appeared on casino correspondence with him. *280 which, in the instant case, was held in Tampa, Florida. *281 The burden of proof is on petitioner, and we cannot assume that missing evidence would be favorable to him.
Kamborian v. Commissioner , 56 T.C. 847">56 T.C. 847469 F.2d 219">469 F.2d 219 (1st Cir. 1972);Pollack v. Commissioner , 47 T.C. 92">47 T.C. 92392 F.2d 409">392 F.2d 409 (5th Cir. 1968). Indeed, the usual inference is that the evidence would be unfavorable.Pollack v. Commissioner, supra at 108Exchange Sec. Bank v. United States , 345 F. Supp. at 491On 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. *286 *285
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 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. *287 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 as a result of the settlement. *288 In the instant case, there is no direct evidence other than petitioner's testimony that he disputed his debt to Caesar's prior to the institution of proceedings in the instant case. Although petitioner contends that his testimony concerning his dealings with the casino was uncontradicted, we need not accept such testimony at face value where it is improbable, unreasonable, or questionable.Quock Ting v. United States , 140 U.S. 417">140 U.S. 417Archer v. Commissioner , 227 F.2d 270">227 F.2d 270Decision will be entered for respondent .Footnotes
*. Brief amicus curiae was filed by C. Kevin McGeehan as attorney for Caesar's World, Inc., and its subsidiaries.↩
1. We note that there is some question as to whether the disputed debt rule applies only to an unliquidated debt, i.e., one the amount of which is undetermined, regardless whether the debt is enforceable,
Zarin v. Commissioner , 92 T.C. 1084">92 T.C. 1084916 F.2d 110">916 F.2d 110 (3d Cir. 1990), or whether the rule also applies where there is a dispute as to a debt's enforceability,Zarin v. Commissioner↩ , 916 F.2d at 115-116. We need not address that question, however, because we hold below that petitioner has not carried his burden of proving that there was a dispute as to either the amount or the enforceability of his debt to Caesar's.2. Petitioner does not argue that the settlement constituted a purchase price adjustment pursuant to sec. 108(e)(5). In
Zarin v. Commissioner↩ , 916 F.2d at 1097-1100, we concluded that sec. 108(e)(5) was inapplicable to the settlement of gambling debts, and that conclusion was not disturbed or criticized by the Court of Appeals for the Third Circuit.3. Petitioner stated at trial that most of the players who had gambled on his credit were deceased.↩
4. The entries in the casino's records for December 1985 increasing the amount of petitioner's debt reflect the return of checks petitioner had given the casino during October 1985, and not the extension of new credit to petitioner. Petitioner maintains that those checks were paid but points to no evidence in the record to support that contention, and we have found none. Indeed, petitioner's contention that the returned checks were paid is contradicted by the entries in Caesar's records that show that, after one check for $ 110,000 was entered on Caesar's records as returned, a second check in that amount was sent to Caesar's, which was also returned.↩
5. Mr. Larry Gaddis, Caesar's assistant collection manager, testified that the records support this conclusion.↩
6. Petitioner testified that, after the golf tournament, he asked Mr. Jones to look into whether a casino employee did not record repayments from the players. Petitioner testified that, while he did not hear specifically what Mr. Jones had learned, he did start receiving settlement offers soon thereafter. However, nothing in the records before us indicates that any investigation of such a matter was made. Furthermore, the records indicate that Caesar's did not begin attempting to settle petitioner's account for less than the balance due until February 1987, over a year after the alleged mishandling of petitioner's account occurred.↩
7. It appears that petitioner could have obtained Mr. Jones' appearance by subpoena. Sec. 7456(a) provides for the subpoena of witnesses by the U.S. Tax Court from any place in the United States to appear at any designated place of hearing. Petitioner contacted Mr. Jones shortly before the trial of the instant case, and Mr. Jones was still employed by the casino then. Respondent subpoenaed an employee of Caesar's from Las Vegas who testified at trial.↩
8. It appears to us that Mr. Jones' relationship to petitioner was not such that he would ordinarily be expected to favor petitioner and that, therefore, he was equally available to both petitioner and respondent.
Kean v. Commissioner , 469 F.2d 1183">469 F.2d 118351 T.C. 337">51 T.C. 337 (1968);McClanahan v. United States , 230 F.2d 919">230 F.2d 919Kean v. Commissioner, supra↩ at 11889. Petitioner also asserts that the casino failed to send his markers to his bank as required by law, a further circumstance that induced it to settle. The portions of the transcript on which petitioner relies for that assertion, however, do not support petitioner's contention. Petitioner does not contest the enforceability of his debt to Caesar's on any other grounds than those set forth herein.↩
10. We have noted above that petitioner offered no plausible explanation for the casino's supposed reluctance to put anything in writing concerning the alleged dispute over petitioner's account other than its settlement offers.↩
11. Respondent claims that petitioner's debt to Caesar's was legally enforceable against him. It was Caesar's practice to obtain judgment against a debtor in the Nevada courts and then to have the judgment enforced against the debtor by the courts of the debtor's home State. A gaming debt evidenced by a credit instrument was legally enforceable pursuant to Nevada law when petitioner incurred his debt to Caesar's.
Nev. Rev. Stat. secs. 463.367 ,463.368(1) (1985). A judgment obtained in the Nevada courts would have been enforceable against petitioner in Florida pursuant to theFull Faith and Credit Clause of the U.S. Constitution, art. IV, sec. 1 , notwithstanding that petitioner's debt to Caesar's would not have been enforceable pursuant to Florida law.Fauntleroy v. Lum , 210 U.S. 230">210 U.S. 230Trauger v. A.J. Spagnol Lumber Co. , 442 So. 2d 182">442 So. 2d 182M & R Invs. Co. v. Hacker , 511 So. 2d 1099">511 So. 2d 1099GNLV Corp. v. Featherstone , 504 So. 2d 63">504 So. 2d 63↩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),
2 C.B. 620">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.13. The court in
Exchange Sec. Bank v. United States , 345 F. Supp. 486">345 F. Supp. 486492 F.2d 1096">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, inZarin v. Commissioner , 916 F.2d at 115-116N. Sobel, Inc. v. Commissioner , 40 B.T.A. 1263">40 B.T.A. 1263Notwithstanding 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.↩
14. We conclude, based on the record, that petitioner has not established the existence of any dispute concerning the enforceability of his debt to Caesar's on any of the grounds alleged by him. The issue as to the enforceability of a debt, which was a factor considered by the Court of Appeals for the Third Circuit in
Zarin v. Commissioner , 916 F.2d at 115-116↩15. Although petitioner did introduce the testimony of a witness besides himself concerning some of the events surrounding the golf tournament, the record establishes that the extensions of credit which gave rise to the debt Caesar's sought to collect arose before the events of December 1985 concerning which the witness testified. Moreover, petitioner's witness did not testify concerning petitioner's later dealings with Caesar's concerning the collection of the debt.↩
16. By order, we permitted Caesar's World, Inc., to file a brief amicus curiae but limited the arguments in the amicus brief to the issues presented by the parties at trial and the evidence in the record. The sole issue presented by petitioner at trial was whether the settlement of his account with Caesar's was of a disputed debt. The amicus brief, however, raises issues not presented by the parties at trial, and respondent claims to be surprised and prejudiced by the raising of those issues. We have disregarded the portions of the amicus brief that do not conform to our order limiting the arguments therein to those presented by the parties at trial.↩
Document Info
Docket Number： Docket No. 3366-94.
Citation Numbers： 71 T.C.M. 3125, 1996 Tax Ct. Memo LEXIS 262, 1996 T.C. Memo. 248
Filed Date： 5/29/1996
Precedential Status： Non-Precedential
Modified Date： 4/18/2021