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
The IRS argued Congress
defined the term gross income to
include "gains or profits and income derived from any source
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
Kirby argued that all they
were doing was getting rid of debt, and that's not the same as making
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
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
Now 26 U.S.C. §61(a)(12) explicitly says that "Income from
discharge of indebtedness" is to be included in gross income.