Marshall Drug Co. v. United States

JONES, Chief Judge.

The issue here is whether cancellations of indebtedness constituted gifts to the debtor, as plaintiff claims, or taxable income, as defendant contends.

Plaintiff, a calendar year and accrual basis corporation, operates a chain of retail drug stores in and around Cleveland. In 1940, although its assets exceeded its current liabilities, plaintiff was operating at a loss and had been for all but one of the five preceding years, the result of inept management. To enable plaintiff to continue in business a plan of reorganization was evolved which included freezing all past due…