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taxpayer owed the corporation. Negotiations between the opposing
factions culminated in a settlement agreement. In Ingalls, the
Court of Appeals for the Fifth Circuit described the agreement as
follows:
Under its terms the company purchased the employment
contract for $228,360 payable in equal installments of
$22,836 on February 1st of the ten next succeeding
years and, in turn, taxpayer agreed to pay off his
outstanding indebtedness to the company of $228,360 in
equal installments of $22,836 on February 1st of the
ten next succeeding years * * * the only security for
the new note being taxpayer’s promise to pay and the
following provision: “[Taxpayer] * * * further agrees
that so long as any part of said indebtedness or any
interest thereon remains unpaid, the company may make
the payments hereinabove agreed to be paid to him by
currently crediting said indebtedness with such
payments as they accrue.” [Id. at 145.]
On the basis of this agreement, the Court of Appeals in
Ingalls held, reversing the District Court, that in substance the
disputed employment contract claim was compromised by a discharge
of indebtedness. The taxpayer was held to be in receipt of
income equal to the discharged indebtedness in the year of
compromise.
The Court of Appeals in Ingalls recognized that mutual debts
do not automatically cancel each other, but equity would
effectuate a setoff of mutual debts where “‘one debt was
contracted on the credit of the other.’” Id. at 145-146 (quoting
Simmons v. Williams, 27 Ala. 507, 511-512 (1855)). The Court of
Appeals in Ingalls stated that, under these circumstances--
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