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not applicable to the facts of the instant case, as the
cancellation of the respondent's past due debt to its
lessor did not have the effect of making the
respondent's assets greater than they were before that
transaction occurred. * * * [Dallas Transfer &
Terminal Warehouse Co. v. Commissioner, supra at 96.]
In Lakeland Grocery Co. v. Commissioner, 36 B.T.A. 289
(1937), the taxpayer, pursuant to a “composition settlement”,
paid to its creditors $15,473 in consideration of being relieved
of the taxpayer's indebtedness to those creditors of $104,710.
Prior to the composition settlement, the taxpayer was insolvent;
after that settlement, the taxpayer had net assets of $39,597.
The Board of Tax Appeals (the Board) agreed with the Commissioner
that the rationale of United States v. Kirby Lumber
Co., 284 U.S. 1, should apply and that gain is realized
to the extent of the value of the assets freed from the
claims of creditors * * * The petitioner's net assets
were increased from zero to $39,596.93 as a result of
the cancellation of indebtedness by its creditors, and
to that extent it had assets which ceased to be offset
by any liability. * * * [Id. at 292.]
C. Discussion
1. Origin of the Net Assets Test
The Board's approach to a taxpayer in financial distress
being discharged of an indebtedness, which approach was
crystallized in Lakeland Grocery Co. v. Commissioner, supra, has
been called, among other things, the “net assets” test.4 That
4 See Surrey, “The Revenue Act of 1939 and the Income Tax
Treatment of Cancellation of Indebtedness”, 49 Yale L. J. 1153,
1164 (1940); Warren & Sugarman, “Cancellation of Indebtedness and
Its Tax Consequences: I”, 40 Colum. L. Rev. 1326, 1352 & n.108
(1940) (“The `net assets' test was first intimated in Porte F.
Quinn, 31 B.T.A. 142, 145 (1934).”); see also Bittker & Thompson,
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