dissenting: I can not agree that the transaction by which the petitioner transferred the Alamo Street property to its principal creditor constituted a sale of that property upon which the petitioner realized a taxable profit of $93,367.35. The facts do not warrant that conclusion. The petitioner had operated at large losses from the date of its organization. Its capital of $200,000 had been entirely wiped out. At December 31, 1927, it had on hand assets of a value of $152,470.16 and had accounts payable of $178,941.01. In order that the petitioner might continue in business its principal creditor agreed to cancel a part of its claim. The petitioner owned property on Alamo Street, which had a depreciated cost to the petitioner of $39,513.42 and which was subject to a mortgage of $25,000. The agreed fair market value of the property in 1928 was $42,507.20. The principal creditor took over this property, assumed the mortgage thereon, and canceled the balance of its claim against the petitioner. To hold that the petitioner realized a taxable profit of $93,367.35 does violence to the principle that the income tax law shall be interpreted in accordance with truth and. substance.
The petitioner admits that it realized a profit upon the transaction represented by the difference between the depreciated cost of *659its equity in tbe Alamo Street property and its fair market value at the date of transfer, or a profit of $2,988.78. It contends, however, that the difference between $2,988.78 and $93,367.35 was a cancellation of indebtedness from which it derived no taxable income. I think its contention is well founded. A reduction of debt liability is not necessarily a realization of taxable income. Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; Meyer Jewelry Co., 3 B. T. A. 1319; United States v. Oregon-Washington R. R. & Nav. Co., 251 Fed. 211; Commissioner v. Simmons Gin Co., 43 Fed. (2d) 327; Burnet v. John F. Campbell Co., 50 Fed. (2d) 487; Commissioner v. Rail Joint Co., 22 B. T. A. 1277; affd., 61 Fed. (2d) 751.
In each case the facts must be considered. In United States v. Kirby Lumber Co., 284 U. S. 1, the facts are that the Lumber Company had gained $137,521.30 in cash within the taxable year by redeeming certain of its bonds for that amount less than it had received for the bonds upon the issuance earlier in the year. By the transaction the company’s cash assets were increased by $137,521.30. The Supreme Court said that the amount was “ an accession to income ” which was “ realized within the year.” No facts obtain in the instant proceedings which bear a close analogy thereto. The proper interpretation of the Kirby Lumber Go. decision is in my opinion indicated by the decision of the Circuit Court of Appeals for the Second Circuit in Commissioner v. Rail Joint Co., supra, in which the decision of this Board at 22 B. T. A. 1277, was affirmed. It was held in that case both by the Board and by the Court that the reduction of the liability was not an “ increment to its [petitioner’s] assets.”
Manifestly if a debtor turns over to his creditor all of his property, which is only a fractional part of the debt owed by him, in settlement of his debt, the debtor derives no taxable income from the transaction. Nothing is received which answers to the definition of “ income ” laid down by the Supreme Court in Eisner v. Macomber, 252 U. S. 189. I can not see, in the instant proceedings, that the petitioner has had any “ increment to its assets ” through the cancellation of a portion of its indebtedness in 1928. At most it realized only a profit measured by the difference between the depreciated cost of its equity in the Alamo Street property and the fair market value of that property at the date of sale.
In my opinion the petitioner’s accounts should be restated for the years 1926, 1927, and 1928, and the net losses for the years 1926 and 1927, to the extent that they were caused by the accrual of unpaid rent which was canceled in 1928, should be restated in accordance with section 272 (g) of the Itevenue Act of 1928.