Rood v. Commissioner
Decision Date | 29 May 1996 |
Docket Number | Docket No. 3366-94. |
Citation | 71 T.C.M. 3125 |
Parties | Edward B. Rood v. Commissioner. |
Court | U.S. Tax Court |
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.
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 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 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 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:
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 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.
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.
OPINIONSection 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 [94-1 USTC ¶ 50,224], 23 F.3d 1032, 1034 (6th Cir. 1994), affg. [Dec. 48,651(M)] T.C. Memo. 1992-673. The income is recognized in the year cancellation occurs. Montgomery v. Commissioner [Dec. 33,536], 65 T.C. 511, 520 (1975). A frequently cited...
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