What is the test for determining whether an employer's discharge of an employee's debt is taxable income?

The very essence of the concept of taxable income "is the accrual of some gain, profit or benefit to the taxpayer." (Commissioner v. Wilcox (1946) 327 U.S. 404, 407, 66 S.Ct. 546, 548, 90 L.Ed. 752, overruled on other grounds in James v. United States (1961) 366 U.S. 213, 221, 81 S.Ct. 1052, 1056, 6 L.Ed.2d 246.) And in deciding whether a taxable gain has accrued to the taxpayer, courts consider all relevant facts and circumstances. (Ibid.) Sometimes income is realized by indirect means; in such cases it is the substance, not the form of the agreed transaction that controls. (Diedrich v. Commissioner (1982) 457 U.S. 191, 195, 102 S.Ct. 2414, 2417, 72 L.Ed.2d 777.)

Courts have found income from the discharge of indebtedness in numerous situations. For instance, a taxpayer will be charged with taxable gain when a third party extinguishes the taxpayer's debt as compensation for services rendered, or consideration for property transferred. As an example, an employer's payment of the employee's income taxes is characterized as payment "in consideration of the services rendered by the employee and was a gain derived by the employee from his labor." (Old Colony Tr. Co. v. Comm'r Int. Rev. (1929) 279 U.S. 716, 729, 49 S.Ct. 499, 504, 73 L.Ed. 918.) The employer's discharge of the employee's tax obligation "is equivalent to receipt by the person taxed." (Ibid.) So, too, where a mortgagor sells property subject to the mortgage, the buyer's assumption of the debt is additional consideration and the seller "realizes a benefit in the amount of the mortgage.... If he transfers subject to the mortgage, the benefit to him is as real and substantial as if the mortgage were discharged...." (Crane v. Commissioner (1947) 331 U.S. 1, 14, 67 S.Ct. 1047, 1055, 91 L.Ed. 1301.)