Zarin v. Commissioner
916 F.2d 110 (3d Cir. 1990)

  • Zarin was a high roller. Resorts International Hotel gave him a $10k line of credit to gamble at their casino. Over time, they raised the limit again and again.
    • Zarin kept losing more and more money.
  • The New Jersey Casino Control Commissioner found a number of violations with Resorts and ordered them to stop extending Zarin's credit.
    • That was to protect compulsive gamblers like Zarin.
  • Resorts kept extending Zarin's credit, and eventually Zarin ended up owing them over $3.4M.
  • Eventually Resorts sued Zarin for their $3.4M. Zarin argued that the claim was unenforceable because the commissioner told Resorts to stop extending Zarin's credit. Eventually Zarin paid $500k and Resorts forgave the other $2.9M.
  • The IRS stepped in and claimed that the $2.9M of forgiven debt was taxable as gross income. Zarin disagreed.
    • The IRS that the $2.9M was income from the discharge of his indebtedness, and 26 U.S.C. 108(e)(1) says that, "the general rule is that gross income includes income from the discharge of indebtedness."
      • See also 61(a)(12), which says basically the same thing.
      • See also United States v. Kirby Lumber Co. (284 U.S. 52 (1931)).
  • The Tax Court found for the IRS. Zarin appealed.
  • The Appellate Court reversed.
    • The Appellate Court found that Zarin's debt was a contested liability.
      • Basically, Zarin's debt wasn't 'forgiven', the debt was unenforceable as a matter of New Jersey law. So it was like he never had the debt in the first place.
      • Under the Contested Liability Doctrine, if the taxpayer disputes the debt in good faith, and it is wiped clean, it doesn't count as discharge of his indebtedness.
    • The Court found that Zarin's debt did not meet the definition of debt in 108(d)(1).
      • 108(d)(1) defined indebtedness as "(A) for which the taxpayer is liable, or (B) subject to which the taxpayer holds property."
      • Since Zarin was found to not be liable for the debt, and didn't hold any of the Casino's property, the money he owed the casino didn't meet the definition.
  • In a dissent it was argued that Zarin did hold property, he got chips. It was Zarin's own fault for losing the chips. He also got a benefit (having fun gambling), so it is unfair for Zarin to not pay taxes.