"All those beatings you took in the ring, I took them with you! I know how  

              you feel! I know when somebody like Tommy comes along, you feel

                          alive. But he's not you, he doesn't have your heart! '

Rocky returns home from Russia after his epic battle with Drago, and discovers that Paulie has signed 'power of attorney' over to Balboa's accountant, who had in turn squandered most of his money on real estate flipping. To make matters worse, the fights have taken a toll on Rocky, leaving him in a condition that forces his retirement and has him miss title bouts, pursuits that may have saved him from bankruptcy. With very few options, the family moves back to the old neighborhood and learns to live with little to nothing again. A fighter named Union Cane wins the vacant heavyweight title.

Things briefly look up when a young fighter from small-town Oklahoma named Tommy Gunn seeks Rocky to help him win the title. Taking in the young fighter gives Rocky a sense of purpose, and he slowly helps Tommy fight his way up the ladder to become a top contender. The cost of this new friendship results in Rocky paying little attention to his son, Robert, who becomes withdrawn and angry.

Tommy's rise through the ranks catches the eye of promoter George Washington Duke, who had been harassing Rocky about facing Union Cane in Tokyo, shortly after he flew back from Russia. Duke uses the promise of a title shot and Tommy's own anger at being compared stylistically to Balboa to convince him to leave Rocky. When Rocky tries to tell Tommy that it's the road to the title and not the title itself that makes a great fighter, Tommy drives off in a huff, leaving Rocky for good. Rocky realizes that Tommy has the skills, but not the heart of a great fighter. He also realizes his mistake with his son and reconciles with him on what is really important to him—his family.

Under Duke, Tommy does indeed win the heavyweight title by knocking Union Cane out in the first round using the training Rocky taught him. However, it is an empty victory as the crowd chants Rocky's name instead, much to Tommy's bemusement. The press tells Tommy that Cane was nothing more than a paper champion. Duke tells him the public will never consider him the real champion because he never fought Balboa. Tommy decides to end matters once and for all by going to Rocky's neighborhood and challenging him to a fight. At first, Rocky declines, but when Paulie intervenes and is punched by Gunn, the stage is set for a brawl. In the beginning, Rocky starts off well. However, during the course of the fight Rocky gets beaten down and has flashbacks of Ivan Drago. When Rocky thinks he is going to lose, he sees Mickey, his old mentor, cheer him on from beyond the grave. Mickey tells Rocky, "Get up, you son of a bitch! 'Cause Mickey loves ya." Out in the street, it is a different ball game than in the ring, as Rocky uses his street skills to knock Tommy out and prove who the real champion is. He indeed does this by humiliating both Tommy and Duke with the whole neighborhood, Robert, and Paulie supporting him.

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