Zarin v. Commissioner

David Zarin (plaintiff) received a line of credit from Resorts casino in New Jersey, which advanced him gambling chips. He became a compulsive gambler, his credit limit was repeatedly raised, and by 1980 he owed $3,435,000. A state regulator had actually issued an emergency order barring further credit to him, but Resorts extended it anyway. Zarin's checks to pay the debt bounced, and Resorts sued. Zarin argued the debt was unenforceable under New Jersey gaming regulations, and the parties settled for $500,000. The IRS Commissioner (defendant) treated the roughly $2.9 million reduction as discharge-of-indebtedness income; the Tax Court agreed.

Whether the discharge of indebtedness resulting from a good-faith settlement that fixes the amount of a genuinely disputed debt is taxable as income.