Stapleton, Circuit Judge, dissenting.
I respectfully dissent because I agree with the Commissioner's appraisal of the economic realities of this matter.
Resorts sells for cash the exhilaration and the potential for profit inherent in games of chance. It does so by selling for cash chips that entitle the holder to gamble at its casino. Zarin, like thousands of others, wished to purchase what Resorts was offering in the marketplace. He chose to make this purchase on credit and executed notes evidencing his obligation to repay the funds that were advanced to him by Resorts. As in most purchase money transactions, Resorts skipped the step of giving Zarin cash that he would only return to it in order to pay for the opportunity to gamble. Resorts provided him instead with chips that entitled him to participate in Resorts' games of chance on the same basis as others who had paid cash for that privilege. Whether viewed as a one or two-step transaction, however, Zarin received either $ 3.4 million in cash or an entitlement for which others would have had to pay $ 3.4 million.
Despite the fact that Zarin received in 1980 cash or an entitlement worth $ 3.4 million, he correctly reported in that year no income from his dealings with Resorts. He did so solely because he recognized, as evidenced by his notes, an offsetting obligation to repay Resorts $ 3.4 million in cash. See, e.g., Vukasovich, Inc. v. Commissioner, 790 F.2d 1409 (9th Cir. 1986); United States v. Rochelle, 384 F.2d 748 (5th Cir. 1967), cert. denied, 390 U.S. 946, 19 L. Ed. 2d 1135, 88 S.C.t. 1032 (1968); Bittker and Thompson, Income From the Discharged Indebtedness: The Progeny of United States v. Kirby Lumber Co., 66 Calif. L. Rev. 159 (1978). In 1981, with the delivery of Zarin's promise to pay Resorts $ 500,000 and the execution of a release by Resorts, Resorts surrendered its claim to repayment of the remaining $ 2.9 million of the money Zarin had borrowed. As of that time, Zarin's assets were freed of his potential liability for that amount and he recognized gross income in that amount. Commissioner v. Tufts, 461 U.S. 300, 103 S.C.t. 1826, 75 L. Ed. 2d 863 (1983); United States v. Kirby Lumber Company, 284 U.S. 1, 76 L. Ed. 131, 52 S.C.t. 4 (1931); Vukasovich, Inc. v. Commissioner, 790 F.2d 1409 (9th Cir. 1986). But see United States v. Hall, 307 F.2d 238 (10th Cir. 1962).
The only alternatives I see to this conclusion are to hold either (1) that Zarin realized $ 3.4 million in income in 1980 at a time when both parties to the transaction thought there was an offsetting obligation to repay or (2) that the $ 3.4 million benefit sought and received by Zarin is not taxable at all. I find the latter alternative unacceptable as inconsistent with the fundamental principle of the Code that anything of commercial value received by a taxpayer is taxable unless expressly excluded from gross income. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 99 L. Ed. 483, 75 S.C.t. 473 (1955); United States v. Kirby Lumber Co., supra. I find the former alternative unacceptable as impracticable. In 1980, neither party was maintaining that the debt was unenforceable and, because of the settlement, its unenforceability was not even established in the litigation over the debt in 1981. It was not until 1989 in this litigation over the tax consequences of the transaction that the unenforceability was first judicially declared. Rather than require such tax litigation to resolve the correct treatment of a debt transaction, I regard it as far preferable to have the tax consequences turn on the manner in which the debt is treated by the parties. For present purposes, it will suffice to say that where something that would otherwise be includable in gross income is received on credit in a purchase money transaction, there should be no recognition of income so long as the debtor continues to recognize an obligation to repay the debt. On the other hand, income, if not earlier recognized, should be recognized when the debtor no longer recognizes an obligation to repay and the creditor has released the debt or acknowledged its unenforceability.
In this view, it makes no difference whether the extinguishment of the creditor's claim comes as a part of a compromise. Resorts settled for 14 cents on the dollar presumably because it viewed such a settlement as reflective of the odds that the debt would be held to be enforceable. While Zarin should be given credit for the fact that he had to pay 14 cents for a release, I see no reason why he should not realize gain in the same manner as he would have if Resorts had concluded on its own that the debt was legally unenforceable and had written it off as uncollectible.