                        T.C. Memo. 1996-248



                      UNITED STATES TAX COURT



                  EDWARD B. ROOD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3366-94.              Filed May 29, 1996.



     Edward B. Rood, pro se.*

     Monica J. Howland, for respondent.



             MEMORANDUM 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


*

     Brief amicus curiae was filed by C. Kevin McGeehan as
attorney for Caesar’s World, Inc., and its subsidiaries.
                                - 2 -

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 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
                                - 3 -

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 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
                                - 4 -

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.    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 the check for $75,000 as

returned on December 10, 1985, and increased the balance owed by
                               - 5 -

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] straight[en]ed 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 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:
                               - 6 -

               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 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
                               - 7 -

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.    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.
                                - 8 -

     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,

1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.   The income is

recognized in the year cancellation occurs.    Montgomery v.

Commissioner, 65 T.C. 511, 520 (1975).   A frequently cited

rationale for the rule is that the cancellation results in an

accession to income by effecting a freeing of assets previously

offset by the liability arising from the indebtedness.      United

States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931); Cozzi v.

Commissioner, 88 T.C. 435, 445 (1987).   If, however, the

cancellation of all or part of a debt is made in settlement of a

dispute concerning the debt, no income from cancellation of

indebtedness arises.1   N. Sobel, Inc. v. Commissioner, 40 B.T.A.

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, 1095-
                                                     (continued...)
                               - 9 -

1263, 1265 (1939); Exchange Sec. Bank v. United States, 345 F.

Supp. 486, 490-491 (N.D. Ala. 1972), revd. on other grounds 492

F.2d 1096 (5th Cir. 1974); see also Colonial Sav. Association v.

Commissioner, 85 T.C. 855, 862-863 (1985), affd. 854 F.2d 1001

(7th Cir. 1988).   Settlement in such circumstances does not

occasion a freeing of assets and accession to income.    N. Sobel,

Inc. v. Commissioner, supra at 1265.    Petitioner bears the burden

of showing that the settlement with Caesar’s did not result in

income from the cancellation of indebtedness.    Rule 142(a).

     Petitioner, relying on Zarin v. Commissioner, 916 F.2d 110

(3d Cir. 1990), revg. 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.2    Petitioner bases his

argument upon certain facts alleged by him which respondent


1
 (...continued)
1096 (1989), revd. 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.
                              - 10 -

disputes.   Petitioner claims that during early December 1985, he

hosted a charity golf tournament at Caesar’s involving 12

players; that at a dinner on the evening before the tournament,

he invited the players to gamble on his credit if they did not

have credit with Caesar’s; that several players obtained chips on

his credit, including one who obtained $100,000 of such chips;

that the players who gambled on petitioner’s credit turned chips

in to the casino cage, including the player who obtained the

$100,000 of chips; and that the return of the chips was not

reflected on petitioner’s account by the casino employee in the

cage.   Petitioner contends that each player reported receiving a

slip of paper when returning chips to the cage, but petitioner

does not know what became of the receipts.   Petitioner claims to

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.3   Petitioner claims that Caesar’s accepted his word.

He claims to have dealt with Mr. Roy Jones, Caesar’s casino



3

     Petitioner stated at trial that most of the players who had
gambled on his credit were deceased.
                              - 11 -

collection manager, and that, after the tournament, he asked Mr.

Jones to look into the absence of payment records.    Although

petitioner states that 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 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
                                - 12 -

1985, not during December of that year as petitioner claims.4

Because the records show that the casino made no additional

extensions of credit to petitioner subsequent to October 1985,

there is no support in those records for petitioner’s contention

that his indebtedness to the casino arose as a result of events

occurring during early December 1985.    Furthermore, petitioner

does not claim that there was any dispute concerning his

liability for or the amount of any of his debts to Caesar's that

arose prior to December 1985.

     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



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.
                              - 13 -

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 1985,5 not during December 1985, as

petitioner contends.   Consequently, any events occurring with

respect to the tournament that petitioner alleged took place

during December 1985 did not affect the debt that Caesar’s sought

to collect from petitioner and which was the subject of the

settlement between them.

     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



5

     Mr. Larry Gaddis, Caesar's assistant collection manager,
testified that the records support this conclusion.
                               - 14 -

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 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
                              - 15 -

dispute” with the casino that lasted over 2-1/2 years.    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.6   However, the IOU envelope and Caesar’s

correspondence with petitioner indicate that petitioner dealt

with a number of Caesar’s employees, and there is nothing in the

records of Caesar’s contacts with petitioner that shows that

petitioner informed Mr. Jones of any dispute with the casino.

Accordingly, it seems that Mr. Jones’ testimony would have been

of value to petitioner in corroborating his claim.   Petitioner

did not call Mr. Jones to testify, claiming that he did not need



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.
                              - 16 -

his testimony and that, in his experience as a lawyer, he had not

been able to subpoena someone from as far away as Las Vegas to

appear at a trial, which, in the instant case, was held in Tampa,

Florida.7

     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, 869 (1971), affd. 469 F.2d 219 (1st

Cir. 1972); Pollack v. Commissioner, 47 T.C. 92, 108 (1966),

affd. 392 F.2d 409 (5th Cir. 1968).    Indeed, the usual inference

is that the evidence would be unfavorable.    Pollack v.

Commissioner, supra at 108.   While we do not go so far as to

infer that Mr. Jones’ testimony would have been unfavorable to

petitioner,8 petitioner must bear the consequences of his failure

to call a witness who apparently could have corroborated his



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,
1188 (9th Cir. 1972), affg. in part and revg. in part 51 T.C. 337
(1968); McClanahan v. United States, 230 F.2d 919, 925 (5th Cir.
1956). In such a situation, no adverse inference is warranted.
Kean v. Commissioner, supra at 1188.
                               - 17 -

claim given the circumstances discussed herein that cause the

facts supporting his allegation that he disputed his debt to the

casino to be in issue.

     Petitioner contends that the casino’s efforts to settle the

debt were the result of its realization that a cage employee had

mishandled chips and the difficulty of winning a suit against

petitioner for collection of the amount it claimed he owed.9

Petitioner points to nothing in any of the documents in the

record that indicates that those considerations prompted Caesar’s

to settle with petitioner.10   Mr. Larry Gaddis, the casino’s

assistant collection manager, who testified at trial, offered the

following considerations that would have induced Caesar’s to

settle petitioner’s account for less than the outstanding

balance:   (1) The age of and minimal payments that had been

received on petitioner’s account; (2) the cost of collecting the

remaining balance of his account were a suit instituted against



9

     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.
                              - 18 -

petitioner; and (3) the benefit to the casino of receiving a lump

sum in the amount of the settlement versus payments over a long

period of time.   Such considerations are not the result of

concerns on the part of Caesar’s as to the enforceability of

petitioner’s debt.11

     Petitioner argues that the fact that the casino settled

petitioner’s debt indicates that the debt was disputed.   We do

not agree.   As to petitioner's contention, we find useful the

analysis in Exchange Sec. Bank v. United States, 345 F. Supp. at

491, which involved a cancellation of indebtedness resulting from

the settlement of litigation to collect a debt.   The District

Court offered the following analysis of the effect of a

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 the Full 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, 237-238 (1908);
Trauger v. A.J. Spagnol Lumber Co., 442 So. 2d 182, 183-184 (Fla.
Dist. Ct. App. 1983); M & R Invs. Co. v. Hacker, 511 So. 2d 1099,
1100-1101 (Fla. Dist. Ct. App. 1987); GNLV Corp. v. Featherstone,
504 So. 2d 63 (Fla. Dist. Ct. App. 1987). Petitioner essentially
conceded in his petition that, had Caesar’s obtained a Nevada
judgment against him, the judgment would have been legally
enforceable against him in Florida. Petitioner, however, alleged
that such circumstance was not relevant because Caesar’s did not
file suit against petitioner because of a “legitimate dispute
concerning the amount due”.
                                - 19 -

settlement that has been made for some of the reasons advanced by

Caesar's in the instant case:

          On 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.[12]

          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

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), 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.
                             - 20 -

     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.
                              - 21 -

as a result of the settlement.14    If a settlement alone were

sufficient to establish the disputed nature of a debt, a taxpayer

whose liability for the full amount of a settled debt was not in

question would reap a windfall in the form of an untaxed freeing

of the assets previously offset by the liability represented by

the debt.   In contrast, in the case of a settlement of a truly

disputed debt, the settlement does not give rise to an accession

to income due to the freeing of the debtor's assets because the

amount of the assets that were offset by the debt is not clear.

     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 (1891); Archer v. Commissioner, 227 F.2d 270, 273 (5th

Cir. 1955), affg. a Memorandum Opinion of this Court dated

February 18, 1954.   We find the evidence supporting and refuting

petitioner’s claim concerning the alleged dispute with Caesar’s,

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, is
accordingly not present in the instant case.
                              - 22 -

at best, to be in equipoise, a state which is insufficient to

carry petitioner's burden of proof.15

     Accordingly, we hold that petitioner has not established by

a preponderance of the evidence that the settlement of his

account with Caesar’s was of a disputed debt.   Consequently, we

further hold that petitioner realized income from the

cancellation of indebtedness in the amount of the balance of that

account written off by Caesar’s; to wit, $255,000.16

     To reflect the foregoing,

                                        Decision will be entered

                                   for respondent.




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.
