Often in foreclosure cases, there is forgiveness of debt, and after that “forgivness” there is tax liability from that foreclosure case…..
But all that “forgiveness” may not be taxable after all……
The issue remaining for decision is whether petitioners had cancellation of indebtedness income from CitiFinancial and Chase.
Section 61(a)(12) includes in the general definition of gross income “income from discharge of indebtedness”. When the amount of a debt is disputed, “a subsequent settlement of the dispute would be treated as the amount of debt cognizable for tax purposes.” Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir. 1990) (holding that unenforceable debt is also disputed as to amount, and its settlement does not give rise to cancellation of indebtedness income) revg. 92 T.C. 1084 (1989); N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263, 1265 (1939). There must be evidence of a dispute; a settlement standing alone does not prove that a good-faith dispute existed. See Rood v. Commissioner, T.C. Memo. 1996-248, affd. without published opinion 122 F.3d 1078 (11th Cir. 1997).
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We reject the Tax Court’s rationale. When a debt is unenforceable, it follows that the amount of the debt, and not just the liability thereon, is in dispute. Although a debt may be unenforceable, there still could be some value attached to its worth. This is especially so with regards to gambling debts. In most states, gambling debts are unenforceable, and have “but slight potential …” United States v. Hall, 307 F.2d 238, 241 (10th Cir.1962). Nevertheless, they are often collected, at least in part. For example, Resorts is not a charity; it would not have extended illegal credit to Zarin and others if it did not have some hope of collecting debts incurred pursuant to the grant of credit.