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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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Last modified: May 25, 2011