The Story of Kirby Lumber: The Many Faces of Discharge of Indebtedness Income
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Description
Surely United States v. Kirby Lumber Co. is one of the shortest Supreme Court opinions ever to pack such a wallop. The Court's opinion is only two paragraphs long, and the first is largely a recitation of the facts. Despite its length (or maybe because of its length), it has spawned seven decades of controversy. The holding of the case is concise—the cancellation of a debt creates taxable income—but the reasoning is obscure and has produced many exceptions and much uncertainty. The situation that gives rise to the Kirby Lumber issue can be stated very simply. Suppose Lender lends Borrower $10,000. Then some time later, because B is unable to repay the full amount of the loan, L agrees to accept $3,000 in satisfaction of the loan. Kirby Lumber holds that B has $7,000 of income. But what if B had taken the $10,000 and lost it all in his business or in gambling so that he did not make any money in the transaction? Or what if at the time L discharged the loan, B was insolvent or had declared bankruptcy? What if L was B's mother who lent the $10,000 to help B pay medical school tuition and on graduation day forgave the loan? What if L had lent B the $10,000 as the sales price of a used car, which turns out to be a lemon, and L accepts $3,000 as payment for the car? The resolution of these cases turns in large part on why the borrower in the simple case has $7,000 of cancellation of debt (“COD”) income. The story begins with Kirby Lumber.
Source Publication
Tax Stories
Source Editors/Authors
Paul L. Caron
Publication Date
2009
Edition
2
Recommended Citation
Schenk, Deborah H., "The Story of Kirby Lumber: The Many Faces of Discharge of Indebtedness Income" (2009). Faculty Chapters. 1364.
https://gretchen.law.nyu.edu/fac-chapt/1364
