## Facts

- N. Sobel, Inc., a New York corporation in the fur-skins business, had an ongoing credit relationship with the Bank of United States, which discounted the company’s notes and extended substantial loans.
- In 1929, during a bank-driven sales campaign, the company was urged to acquire 100 “stock units” (a bank share plus a Bancus Corporation share per unit) for $21,700, with assurances that the bank would lend the purchase price and that the shares would increase in value.
- The company issued a 30-day note to the bank for $21,700; the bank discounted the note and retained the stock certificate as collateral. The note was renewed repeatedly and not paid.
- On November 26, 1930, the company refused further renewals and sued the bank seeking rescission of the stock/loan transaction and recovery of interest paid, alleging illegality and unfulfilled assurances; the bank counterclaimed for the note’s full amount plus interest.
- In December 1930, the bank became insolvent and entered receivership; the litigation continued.
- In October 1935, the parties settled: the company paid $10,850 (half the note’s face amount) to resolve both the bank’s claim on the note and the company’s rescission-related claims.
- On its return for the fiscal year ended November 30, 1935, the company deducted the $10,850 as a loss.
- The Commissioner (1) disallowed the deduction on the view that any loss related to stock worthlessness occurred before 1935 and (2) included $10,850 in 1935 income as discharge-of-indebtedness gain (difference between $21,700 and $10,850).

## Issues

1. Whether the $10,850 settlement payment was a deductible loss for the fiscal year ended November 30, 1935, despite the stock’s alleged prior worthlessness.
2. Whether the $10,850 difference between the note’s face amount and the settlement amount was taxable discharge-of-indebtedness income.

## Decision

- The Board allowed the $10,850 deduction as a loss in 1935, treating the settlement of the litigation as the event that fixed and determined the liability.
- The Board held that the $10,850 difference was not taxable income from discharge of indebtedness, distinguishing situations involving reduction of a conceded, fixed debt.
- The deficiency was reduced accordingly.

## Legal Principles

- A payment made to settle litigation over a genuinely disputed obligation may be deducted as a loss in the year the settlement fixes the taxpayer’s liability and amount (the year of accrual), even if related economic events occurred earlier.
- Discharge-of-indebtedness income generally requires cancellation or reduction of a valid, definite, and admitted liability; a compromise of a contested liability, where enforceability or amount is disputed, does not necessarily create taxable income measured by the difference between the claim’s face amount and the settlement payment.

## Conclusion

The Board treated the 1935 compromise as fixing the taxpayer’s loss from resolving disputed claims and rejected treating the forgiven portion of the note as discharge-of-indebtedness income because the liability was contested rather than a conceded, fixed debt later paid for less than face value.


N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263 (1939)