## Facts

- Edward B. Rood incurred gambling debts at Caesars Palace in May and October 1985 using casino credit.
- By December 1985, the balance owed to Caesars was $435,000.
- Rood paid $80,000 toward the debt during 1986 and 1987, leaving a $355,000 balance by March 1988.
- In 1988, Caesars offered to accept a reduced amount to satisfy the debt; negotiations continued after an initial deadline passed.
- Rood ultimately paid $100,000, and Caesars agreed to write off the remaining $255,000.
- Rood did not report the $255,000 write-off as income on his 1988 federal return.
- The IRS determined the write-off was cancellation-of-indebtedness income for 1988 and asserted a $60,457 deficiency.
- Rood claimed the stated debt was overstated because others allegedly gambled on his credit during a charity event and because Caesars allegedly failed to credit repayments; he also claimed he disputed the balance by telephone.
- The court found no credible corroboration for Rood’s dispute claims and relied on Caesars’ records establishing the debt and its cancellation.

## Issues

1. Whether the $255,000 written off by the casino in 1988 was taxable cancellation-of-indebtedness income to Rood.
2. Whether the contested-liability (disputed debt) doctrine applied so that the settlement amount fixed the true debt, eliminating cancellation-of-indebtedness income.

## Decision

- The Tax Court held that Rood realized $255,000 of cancellation-of-indebtedness income in 1988 when Caesars forgave that portion of his gambling debt.
- The court rejected Rood’s contested-liability argument due to lack of credible evidence of a bona fide dispute over the amount owed.
- The court sustained the IRS’s determination of a $60,457 deficiency for 1988.

## Legal Principles

- Discharge of indebtedness generally produces gross income because the taxpayer is relieved of an obligation to repay.
- Under the contested-liability doctrine, if the taxpayer in good faith disputes the amount of a debt and the parties settle, the settled amount may be treated as the debt’s amount for tax purposes, rather than generating discharge-of-indebtedness income for the difference.
- The taxpayer bears the burden to rebut the deficiency determination and to prove facts supporting application of an exception or doctrine; unsupported assertions will not overcome reliable creditor records.

## Conclusion

Because Rood failed to prove a bona fide dispute over the amount of his casino debt, the forgiveness of $255,000 was treated as cancellation-of-indebtedness income taxable in 1988, and the asserted deficiency was sustained.


Rood v. Commissioner, T.C. Memo. 1996-248, 71 T.C.M. (CCH) 3125 (1996)