Stuart R. Quartemont and Velvet F. Quartemont - Page 5

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          Gross income is defined in section 61(a) as all income from                 
          whatever source derived, and income from discharge of                       
          indebtedness is specifically included in the definition of gross            
          income.  Sec. 61(a)(12).                                                    
          The Supreme Court long ago articulated the principle that                   
          increases in net worth from forgiveness or cancellation of                  
          indebtedness give rise to gross income, United States v. Kirby              
          Lumber Co., 284 U.S. 1 (1931), but there are recognized                     
          exceptions to this general principle.  The Court of Appeals for             
          the Fifth Circuit, to which this case would be appealable if it             
          had not been heard pursuant to section 7463, was among the first            
          Courts of Appeals to develop an “insolvency exception”, in 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. v. Commissioner,                 
         supra at 96, the taxpayer’s relief from indebtedness did not                 
         result in gross income where he was insolvent both before and                
         after the debt was discharged.  The court stated:                            
              This [relief from indebtedness] does not result in the                  
              debtor acquiring something of exchangeable 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 accepted definition of income.              
              Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed.                
              521, 9 A.L.R. 1570; Merchants’ L. & T. Co. v. Smietanka, 255            
              U.S. 509, 519, 41 S.Ct. 386, 65 L.Ed. 751, 15 A.L.R. 1305.              
              It hardly would be contended that a discharged insolvent or             
              bankrupt receives taxable income in the amount by which his             






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