United States v. Kirby Lumber Co.
284 U.S. 52 (1931)

  • Kirby issued some bonds. Later in the same year it bought the bonds back.
    • They bought the bonds back for $137k less than what they sold them for.
  • The IRS claimed that the $137k was taxable as gross income. Kirby disagreed.
    • The IRS argued Congress defined the term gross income to include "gains or profits and income derived from any source whatsoever."
    • The IRS argued that the relevant Treasury Regulation explicitly stated that when a company buys back its own bonds at less than what they sold them for, the difference is taxable.
    • Kirby argued that all they were doing was getting rid of debt, and that's not the same as making money.
  • The Trial Court found for Kirby. The IRS appealed.
    • The Trial Court based their decision on Bowers v. Kerbaugh-Empire Co. (271 U.S. 170 (1925)), a case in which a loan repaid in devalued German marks was not considered to be a taxable gain for the taxpaying company.
  • The Appellate Court reversed and found the profit to be taxable.
    • The Appellate Court found that if a corporation purchases and retires bonds at a price less than their face value or issuing price, the excess amount of the purchase price over the issuing price is a taxable gain.
    • The Court noted that Kirby had clearly made a profit on the transaction, and there was no reason why that profit shouldn't be taxable.
  • Basically, the point of this case is that since you must pay taxes when you "buy low then sell high," you are also equally liable when you "sell high then buy low."
    • Now 26 U.S.C. 61(a)(12) explicitly says that "Income from discharge of indebtedness" is to be included in gross income.