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payer’s] dealings it made available $137,521.30 [of] assets
previously offset by the obligation of bonds now extinct.” Id.
at 3.
Several years after the Supreme Court decided Kirby Lumber
Co., the U.S. Court of Appeals for the Fifth Circuit distin-
guished that case and established an insolvency exclusion to the
rule that the Supreme Court had announced in that case. See
Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 F.2d
95 (5th Cir. 1934), revg. 27 B.T.A. 651 (1933). In Dallas
Transfer & Terminal Warehouse Co., the taxpayer was relieved of
indebtedness as the lessee of certain real property with respect
to unpaid rent and other bills totaling $107,881 when it conveyed
to the lessor of that property certain real property of lesser
value (i.e., $42,507) in which the taxpayer’s equity at the time
of conveyance was $17,507. See id. The Court of Appeals held
that the taxpayer did not realize income as a result of that
transaction. See id. at 96. In so holding, the Court of Appeals
stated:
In effect the transaction was similar to what occurs in
an insolvency or bankruptcy proceeding when, upon a
debtor surrendering, for the benefit of his creditors,
property insufficient in value to pay his debts, he is
discharged from liability for his debts. This does not
result in the debtor acquiring something of exchange-
able value in addition to what he had before. There is
a reduction or extinguishment of liabilities without
any increase of assets. There is an absence of such a
gain or profit as is required to come within the ac-
cepted definition of income. * * * It hardly would be
contended that a discharged insolvent or bankrupt
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