Zarin v. Commissioner , 916 F.2d 110 (3rd Cir 1990) is the decision of the US Third Circuit Court of Appeal regarding the cancellation of the debt and the tax consequences for borrowers for US federal income tax purposes.
Video Zarin v. Commissioner
​​â € <â €
Resorts International Hotel & amp; Casino ("Resorts"), a casino in Atlantic City, New Jersey, was awarded David Zarin ("Zarin"), a housing developer and (later to prove) a gambling addict, a credit line of $ 10,000 in June, 1978. Under this arrangement , Zarin can write checks ("markers") and in return receive chips to gamble on the casino table; Zarin almost always plays dice. Over time, the Resort regularly increased its credit limit, and by November 1979, Zarin's permanent credit limit had reached $ 200,000. The New Jersey Division of Gaming Enforcement filed with the New Jersey Casino Control Commission a complaint against Resorts in response to allegations of credit misuse. Subsequently, the Casino Control Commissioner issued an Emergency Order which made further extension of the credits illegal for Zarin. Nevertheless, Resorts continues to extend Zarin's credit limit. In April 1980, Zarin sent personal checks and countercheck to Resorts who were returned for being withdrawn against insufficient funds. The dishonest checks amounted to $ 3,435,000. In response, Resorts cut Zarin's credit and filed a lawsuit in a New Jersey state court. Resorts and Zarin settle their dispute for a total of $ 500,000.
The Commissioner then determined the deficiency in Zarin's federal income tax, arguing that Zarin had admitted $ 2,935,000 in revenues in 1981 from the cancellation of debt caused by the settlement with the Resort. The Tax Court agrees with the Commissioner.
Problems
The only problem before the Court is whether the Tax Court correctly states that Zarin has an income from repayment of its debt.
Maps Zarin v. Commissioner
Holding
Zarin realized there was no income from the settlement for two reasons. Firstly, the provisions of the Federal Income Tax Code that include debt relief can not be applied because the situation fails to meet the requirements of section definition 108 (d) (1). Second, the settlement of Zarin gambling debt is "contested obligation."
Court reasons
The Court concluded that sections 61 (a) (12) and Article 108 of the Internal Revenue Code provide a general rule that gross income includes income from debt disposal. However, the court stated that none of the parts were applied to the case being handled. Section 108 (d) (1), which repeats and further specifies the rules set forth in article 61 (a) (12), defines the debt of the term as any debt "(A) to which the taxpayer is liable, or (B ) subject to the taxpayer who owns the property. "The court declared that no branch of section 108 (d) (1) was satisfied in the case, and, as a result, Zarin was unable to earn from its debt repayment.
According to the court, the debt can not be enacted as a New Jersey legal issue because of an Emergency Order issued by the New Jersey Casino Control Commission. As a result, the credit line is clearly not a debt "that the tax payer is responsible." Subsequently, the Court stated that the gambling chip does not belong but "only the accounting mechanism for debt evidence." Zarin can not do it with the chip at will, and so does the chip have no independent economic value outside the casino. In addition, because Zarin's debt at any time matches or exceeds the number of chips he owns, the redemption will leave Zarin with no chip or cash. The court concluded that Zarin's debt is not subject to property held by taxpayers.
The Court further states that the appropriate approach to the case is to view it as a disputed debt or "contested liability." Under the doctrine of responsibility in question, if a taxpayer, in good faith, debates the amount of debt, the subsequent settlement would be considered the amount of recognizable debt for tax purposes. "The excess of the original debt over the prescribed amount has matured for both loss and the purpose of debt accounting." Following this doctrine, the court concluded that a $ 500,000 settlement fixes the amount of recognizable losses and liabilities for tax purposes.
Dissent
The disagreement states that Zarin owns the property in a gambling chip issued by Resorts. According to disagreements, Zarin wants to buy what Resorts are offering in the market, and Resorts provides Zarin with chips instead of cash to give her the right to gamble at Resorts casinos. "Zarin received $ 3.4 million in cash or rights that other people have to pay $ 3.4 million." Therefore, with the settlement, Resorts submitted his claim to the payment of the remaining $ 2.9 million owed by Zarin, and Zarin's assets were exempted from that amount and he recognized the gross income.
Impact
Under federal income tax, the loan is not a gross income to the borrower because the borrower has an obligation to repay the amount received and no accession of the property. Along the same line, the lender can not reduce the loan amount because the loan only changes one asset (cash) into another asset (a repayment promise). Furthermore, if the lender pardoned or canceled the debt, there might be a consequence of the income tax for the borrower.
These common axioms directly affect many taxpayers because millions of people across the United States deal with loans and debts. Consequently, the principles discussed and analyzed in Zarin v. Commissioner is relevant to any taxpayer concerned with the matter. According to the decision, the cancellation of debt through the settlement process, no matter the amount of pre-settlement debt, releases the taxpayer from the debt obligations without creating taxable income. "The excess of the original debt over the prescribed amount has matured for both loss and the purpose of debt accounting."
Critique
The Tenth Circuit criticized the decision of Zarin in Preslar v. Commissioner , indicating that the Third Circuit has been mistaken in treating the liquidated debt and not liquefying equally.
The problem with holding the Third Circuit is to treat the liquidated and uncollectible debts. The whole theory behind requiring that the amount of debt be debated before the exemption of contested liability can be triggered is that only in the context of the disputed debt is the Internal Revenue Service (IRS) is unaware of the precise consideration initially exchanged in the transaction.. The fact that a taxpayer challenges the enforceability of debt in good faith does not necessarily mean he is protected from debt repayment at the settlement of the dispute. To imply the doctrine of contested responsibility, the original amount of debt should be not polluted. Rejection of total liabilities is not a dispute that touches the amount of debt underlying it.
References
External links
- Working related to Zarin v. Commissioner on Wikisource
- Text Zarin v. Commissioner , 916 F.2d 110 (3rd Cir. 1990) is available from: CourtListener Ã, Justia Ã, OpenJurist Google Scholar
Source of the article : Wikipedia
0 Comments