## Facts

- In 1938, Eleanor A. Bradford’s husband owed a Nashville bank about $305,000, much of it unsecured.
- To avoid adverse effects from disclosure of his large indebtedness under a New York Stock Exchange reporting rule, the bank agreed to substitute Mrs. Bradford as obligor for part of his debt.
- Mrs. Bradford executed a $205,000 note to the bank without receiving money, property, or other consideration; her husband remained liable on separate notes totaling $100,000.
- Around 1940, Mrs. Bradford replaced the $205,000 note with two notes: a $105,000 secured note (with collateral pledged) and a $100,000 unsecured note.
- In 1943, a bank examiner required the bank to write off $50,000 of the $100,000 unsecured note.
- In 1946, the bank offered to sell the $100,000 unsecured note for $50,000 (its book value).
- Mrs. Bradford’s husband arranged for his half-brother to acquire the note for $50,000 using funds furnished by Mrs. Bradford and her husband; the half-brother acted as their agent and did not intend to enforce the note.
- The parties treated the transaction as a discharge of Mrs. Bradford’s $100,000 indebtedness for $50,000.
- Mrs. Bradford was solvent before and after the discharge.
- The Commissioner determined a 1946 deficiency, asserting Mrs. Bradford realized $50,000 of ordinary income from discharge of indebtedness; the Tax Court sustained the deficiency.

## Issues

1. Whether a solvent taxpayer realizes taxable cancellation-of-indebtedness income when a note is effectively discharged for less than face value, where the taxpayer received no consideration when assuming the underlying obligation.
2. Whether the 1946 transaction produced an accession to wealth for Mrs. Bradford within gross income principles, given the debt originated as a reshuffling of her husband’s preexisting liability.

## Decision

- The Sixth Circuit reversed the Tax Court.
- The court held Mrs. Bradford did not realize taxable income in 1946 from the $50,000 reduction of the $100,000 note.
- The court treated the transaction’s substance as not creating any net economic gain to Mrs. Bradford, given the origin and purpose of the obligation.

## Legal Principles

- Cancellation of indebtedness is not taxable income where the taxpayer received no consideration or economic benefit when incurring the debt and the later discharge does not result in a net economic gain.
- In determining whether a debt reduction produces income, courts may evaluate the entire transaction and its economic effect rather than isolating the formal discharge event.
- The general rule that a solvent debtor recognizes income upon discharge for less than face amount applies most clearly when the original liability arose from borrowing or a value-received transaction that increased the taxpayer’s assets.
- Substance controls over form when the taxpayer’s obligation functioned as a device to recharacterize another person’s debt without conferring value on the taxpayer.

## Conclusion

The Sixth Circuit held that a solvent taxpayer did not recognize cancellation-of-indebtedness income where she assumed her husband’s bank obligation without receiving consideration and the later discharge for less than face amount did not leave her economically better off, reversing the Tax Court’s deficiency determination.


Bradford v. Comm’r, 233 F.2d 935 (6th Cir. 1956)