Washington Law Review




Randall and Fender, sole and equal shareholders of Fender Sales, Inc., twice cancelled equal salary debts owned to them by their corporation. As part of these transactions, the corporation issued $100 par value common stock for each $100 of salary debt owed. Neither the corporation, which had previously deducted the salary liabilities as expenses for federal income tax purposes, nor the individuals, who were cash basis taxpayers, reported any income as a result of these transactions. The Commissioner of Internal Revenue determined that the receipt of stock constituted taxable salary income to the individuals or, alternatively, that the cancellation resulted in income to the corporation. The Tax Court held that the transactions did not affect the taxable income of either the individual or the corporation. On appeal by the Commissioner, reversed and held: Voluntary relinquishment by sole shareholders of salary debts owed to them by their corporation constitutes realization of income to the shareholder-creditors to the extent of the value of the obligations discharged; receipt of stock by employees in discharge of salary obligations owed to them constitutes a realization of income by the employees in the amount of the fair market value of the stock. Commissioner v. Fender Sales, Inc., 338 F.2d 924 (9th Cir. 1964), cert. denied, 381 U.S. 935 (1965).

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