Discharge of Debt

By the end of 1979, David Zarin’s debt with the Resort casino reached $2,500,000, which Zarin was able to repay the full amount (James Musselman, 2004). In the wake of reports of credit anomalies, many of them traced back to Zarin, the New Jersey Casino Control Commission issued an Emergency Order, stopping the casino from extending any further credit to Zarin (Musselman, 2004). Despite the order, the casino continued to extend the credit line of Zarin, which resulted in the accumulation of $3,435,000 (Musselman, 2004).

The hotel filed an action against Zarin, with Zarin settling the suit for $ 500,000 (Musselman, 2004). Zarin defended himself against the motion, saying that in New Jersey, the law was protecting compulsive gamblers like him (Alt Law). In the opinion of the IRS, Zarin did have income from the discharge of indebtedness (Alt Law). The issue here in this discussion is in the promulgation of the decision, was the Tax Court correct in that it held the petitioner Zarin generated income from the discharge of indebtedness (Alt Law).

In the opinion of the respondent petitioner, gross income is generated from any source, including that from the discharge of indebtedness (University of Pittsburgh Law School). But not forms of discharge of indebtedness generate income. The increase gained by the debtor is only a result of liberating the assets to pay the debt (Pittsburgh). In the case of Bowers vs. Kerbaugh Co. (271 U. S. 170 (1926) before the United States Supreme Court, the company lost money on loan in a business deal gone sour (Pittsburgh). The debt was satisfied by payment of an amount less than the actual amount of the money (Pittsburgh).

In that case, the Supreme Court held that the amount was not to be seen as income from discharge of debt (Pittsburgh). In the Zarin case, he used the case of United States vs. Hall (307 F. 2d 238 (10th Cir. 1962), wherein the petitioner avers that the cancellation of indebtedness doctrine does not apply to debts in gambling (Pittsburgh). This C. O. D or cancellation of debt is the amount that is condoned by the lender to the debtor and is taxable (Investopedia, 2009). Arguing from the ambit of United States vs. Hall (307 F. 2d 238 (10th Cir. 1962), the payment of the settlement to Resorts did not result in any income for himself (Pittsburgh).

But in the case of Vukasovich, Inc. vs. Commissioner (765 F. 2d 1387, 1390 (9th Cir. 1985), the Ninth Circuit Court of Appeals refused to apply the provisions of Kerbaugh-Empire (Pittsburgh). It should then be said that the Court did not err in their decision in taxing Zarin for the income generated from the discharge of indebtedness (Pittsburgh). Zarin did acquire value at the instance he signed on to the debt and his assurance hindered the payment of the tax on the transacted amount (Pittsburgh).