Court Opinion

ID: 4486221
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:16.771579+00
Date Added: 2024-06-11T15:03:48.999797
License: Public Domain

Tannenwald, J., dissenting: The foundation of the majority’s reasoning is that Mr. Zarin realized income in an amount equal to the amount of the credit extended to him because he was afforded the “opportunity to gamble.” Based upon that theory, the majority concludes that Mr. Zarin is seeking to reduce the amount of his loss and that this approach runs afoul of the now discredited (according to the majority) “diminution of loss” approach of the Supreme Court in Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926). I find it unnecessary to rely on Kerbaugh-Empire and, therefore, need not embrace or reject the approach of that case. I am constrained to note, however, that it does not follow from the “freeing of asset” approach adopted by the Supreme Court in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), that Kerbaugh-Empire is moribund for all purposes. Nor does such moribundity flow from United States v. Kirby Lumber Co., 284 U.S. 1 (1931), or Commissioner v. Tufts, 461 U.S. 300 (1983). See Colonial Savings Association v. Commissioner, 85 T.C. 855, 862 n. 11 (1985), affd. 854 F.2d 1001 (7th Cir. 1988). I think it highly significant that in all the decided cases involving the cancellation of indebtedness, the taxpayer had, in a prior year when the indebtedness was created, received a nontaxable benefit clearly measurable in monetary terms which would remain untaxed if the subsequent cancellation of the indebtedness were held to be tax free. Such is simply not the case herein. The concept that petitioner received his money’s worth from the enjoyment of using the chips (thus equating the pleasure of gambling with increase in wealth) produces the incongruous result that the more a gambler loses, the greater his pleasure and the larger the increase in his wealth.1 Under the circumstances, I think the issue of enforceability becomes critical. In this connection, the repeated emphasis by the majority on the stipulation that Mr. Zarin intended to repay the full amount at the time the debt was created is beside the point. If the debt was unenforceable under New Jersey law, that intent is irrelevant. It is clear that respondent has not shown that the checks Mr. Zarin gave Resorts were enforceable under New Jersey law. New Jersey law provides that checks issued to pay for gambling are enforceable provided that a set of requirements relating to, among other things, proper payees, dating and holding periods, is met. See N.J. Stat. Ann. sec. 5:12-101 (West 1988). “Any check cashed, transferred, conveyed or given in violation of * * * [those requirements] shall be invalid and unenforceable for the purposes of collection.” N.J. Stat. Ann. sec. 5:12-101(f) (West 1988). Furthermore, strict compliance with those requirements is mandatory for a check to be enforceable. GNOC, Corp. v. Endico, 692 F. Supp. 1515 (S.D.N.Y. 1988); Resorts International Hotel, Inc. v. Salomone, 178 N.J. Super. 598, 429 A.2d 1078 (App. Div. 1981). Respondent simply has not shown that the markers given Resorts by Mr. Zarin were drawn and handled in strict compliance with the statute. In fact, the number of violations of the emergency order asserted against Resorts by the New Jersey gambling commission, including some betting transactions with petitioner, casts substantial doubt on whether the checks2 were in fact so handled. Respondent seeks sustenance from Flamingo Resort, Inc. v. United States, 664 F.2d 1387 (9th Cir. 1982), which held that unenforceability under Nevada law did not nullify the “all events test” so as to avoid accruability by a casino of accounts receivable represented by markers from gambling patrons.3 Respondent’s reliance on Flamingo Resort is misplaced. I think it significant that the Ninth Circuit Court of Appeals made it clear that legal enforeceability could be relevant in determining accruability of income and that its holding was “merely * * * that under the circumstances of this case its absence is not controlling.” 664 F.2d at 1391. The foundation of the court’s conclusion in Flamingo Resort was that the commercial reality was that the casino could expect to collect on those markers in the normal course of events. As the Ninth Circuit Court of Appeals put it: “The debts which the ‘markers’ represent are * * * fixed; there is a reasonable expectancy of collection; and no contention has been made that the amounts cannot be determined with reasonable accuracy.” 664 F.2d at 1390 (emphasis supplied). I do not think any such standard can be met in the instant case. Given the size of Mr. Zarin’s indebtedness, the clear indication from the New Jersey Casino Control Commission that violations of the New Jersey gambling law were involved and the specific provisions of New Jersey law as to the unenforceability of gambling debts, I think it obvious that Mr. Zarin would resist any attempt to collect.4 The fact that such resistance actually occurred supports this point of view. Thus, I think it clear that there was no “reasonable expectancy of collection” and that the circumstances of this case are quite different from those involved in Flamingo Resort. In any event, that case dealt with the accruability of income to the casino; here the issue is the existence of income when a gambling debt is discharged. In resolving that issue, I think it significant that because the debts involved herein were unenforceable from the moment that they were created, there was no freeing up of petitioners’ assets when they were discharged, see United States v. Kirby Lumber Co., supra, and therefore there was no increase in petitioners’ wealth that could constitute income. Cf. Commissioner v. Glenshaw Glass Co., supra. This is particularly true in light of the fact that the chips were given to Mr. Zarin with the expectation that he would continue to gamble and, therefore, did not constitute an increase in his wealth when he received them in the same sense that the proceeds of a non-gambling loan would. Cf. Rail Joint Co. v. Commissioner, 22 B.T.A. 1277 (1931), affd. 61 F.2d 751 (2d Cir. 1932) (cited in Commissioner v. Tufts, 461 U.S. at 209 n. 6), where we held that there was no income from the discharge on indebtedness when the amount paid for the discharge was in excess of the value of what had been received by the debtor at the time the indebtedness was created even though the face amount of the indebtedness and hence the taxpayer’s liability was reduced; Fashion Park, Inc. v. Commissioner, 21 T.C. 600 (1954) (same holding). I am reinforced in my conclusion by the outcome in United States v. Hall, 307 F.2d 238 (10th Cir. 1962). In that case, the court held that there was no income from the discharge of gambling indebtedness because the debt was not enforceable under Nevada law, and observed that such a debt “has but slight potential and does not meet the requirements of debt necessary to justify the mechanical operation of general rules of tax law relating to cancellation of debt.” 307 F.2d at 241. While a gambling debt is not unenforceable under all circumstances in New Jersey, the indebtedness involved herein was unenforceable, and I agree with the court in Hall that an unenforceable “gambling debt * * * has no significance for tax purposes,” 307 F.2d at 242, at least where such unenforceability exists from the moment the debt is created.5  I find further support for my conclusion from the application of the principle that if there is a genuine dispute as to liability on the underlying obligation, settlement of that obligation will not give rise to income from discharge of indebtedness. N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263 (1939), cited with approval in Colonial Savings Association v. Commissioner, 85 T.C. 855, 862-863 (1985), affd. 854 F.2d 1001 (7th Cir. 1988). Respondent simply has not met his burden of showing that the dispute between Resorts and Mr. Zarin was not a genuine dispute as to Mr. Zarm’s liability for the underlying obligations, and I believe that, at least as to that debt that was not entered into as required by New Jersey law and was therefore unenforceable, the dispute was in fact genuine. While there is language in Sobel and Colonial Savings indicating that United States v. Kirby Lumber Co., supra, applies when there is a liquidated amount of indebtedness, I do not read that language as requiring that Kirby Lumber must apply unless the amount is unliquidated, where there is a genuine dispute as to the underlying liability. I would hold for petitioner. Wells, J., agrees with this dissent.  I think it clear that, although theoretically the chips could have been redeemed for cash instead of being used for gambling, any attempt by Mr. Zarin to follow this path would have been known to Resorts’ personnel and strongly resisted.   The markers used to extend credit, in the form of drafts drawn by Mr. Zarin on his bank and payable to Resort’s order, are checks within the meaning of the Uniform Commercial Code. See N.J. Stat. Ann. sec. 12A:3-104(2) (West 1962); U.C.C. sec. 3-104(2).   We reached the opposite conclusion, based upon a concession by respondent, in Desert Palace, Inc. v. Commissioner, 72 T.C. 1033 (1979), revd. without published opinion 698 F.2d 1229 (9th Cir. 1982), a reversal which was foreshadowed in Flamingo Resort, Inc. v. United States, 664 F.2d 1387, 1391 n. 8 (9th Cir. 1982).   It is clear that any inference that Mr. Zarin intended to pay the debts at issue which could be drawn from his stipulated intentions is obviated by his actions in disputing the debt and in settling the debt for less than its face amount.   Mr. Zarin’s permanent line of credit, which might have measured the amount of his indebtedness that could clearly have been enforced ($215,000), was less than the amount he paid by way of settlement ($500,000).