REALIZATION OF INCOME THROUGH CANCELLATIONS, MODIFICATIONS, AND BARGAIN PURCHASES OF INDEBTEDNESS: I

Treasury regulations bearing on the tax consequence of a cancellation, modification, or bargain purchase of one's outstanding indebtedness date back to those issued in connection with the Revenue Act of 1918. Thirteen years elapsed after their issuance before the Supreme Court in 1931 finally approved, at least with respect to the bargain purchase with which it was concerned, the principal which the regulations incorporated, namely, that the savings effected by such debtors could, as a constitutional as well as a statutory matter, involve the realization of taxable income. Competing interpretations of that decision, the government insisting on a sweeping application of its philosophy while debtors quite naturally argued that it should be confined pretty much to its facts, forced the courts, principally the lower ones, to inquire into the significance of each of the major aspects of those situations where some kind of gain is derived by a debtor from an adjustment or bargain discharge of his indebtedness.