United States v. Kirby Lumber Co. United States v. Kirby Lumber Co. Facts: In this case, the plaintiff, the Kirby Lumber Company issued bonds in July of
United States v. Kirby Lumber Co. United States v. Kirby Lumber Co.
Facts:
In this case, the plaintiff, the Kirby Lumber Company issued bonds in July of 1923, for USD 12,126,800.00. This said in the same year the firm Kirby Lumber Co. decided to purchase back some of its own issued bonds. However, the buy-back was for a lower amount than the actual original face value. In other words, it was less than the par value that the company collected at the time of issuing them. Consequently, Kirby Lumber Company achieved savings in the amount of roughly USD 137,521.30 by doing so. Therefore, the court made the argument that this amount should be reported as taxable income.
Issue:
The question in this case is whether or not, the difference realized of USD 137,521.30 as part of purchasing back the bonds in the open market is considered taxable and classified either as a “gain” or “income,” while it should be reported as such in the year of 1923, by the Kirby Lumber Company. This said the case was taken up by Mr. Justice Holmes, who ruled on this case on behalf of the court accordingly.
Rule:
Mr. Justice Holmes applied the Revenue Act of 1921, c. 136, §213(a), which clearly states that gross income includes any amounts related to profit/gains stemming from any source no matter what. Hence, he considered the USD 137,521.30 as taxable income.
Analysis:
Additionally, the Treasury Regulation further substantiated Justice Holmes’ stand, since Section 1303 stipulates that the difference of the excess of the issuing face value amount (issuing price) over the price, a firm is paying to buy back some of its initially issued bonds, is considered a taxable income or gain in the respective year. Therefore, it was clear that Kirby Lumber Co., realized a gain/income, as part of its bond transactions that were taxable. In fact, in this case Kirby’s Lumber Co. assets did not shrink, but rather produced a clear gain. Consequently, this gain was taxable, because in the year of 1923 the firm realized a gain stemming from first issuing and then re-purchasing some of its own bonds in the market, which resulted in a profit of USD 137,521.30.
Conclusion:
Applying the Revenue Act of 1921, c. 136, Section 213(a), Justice Holmes found no reason why the gain realized by Kirby Lumber Co., as part of issuing and repurchasing its bonds in the open market is not considered a profit/gain realized from any source. At the same time, the Treasury Regulation Section 1303 further solidifies the ruling that the amount of USD 137,521.30 is taxable income. In fact, since the gain represents the difference of the excess of the issuing face value amount over the actual re-purchasing price of the bonds by Kirby Lumber Co., it is classified as taxable income and taxes are owed by the company accordingly. In other words, Justice Holmes did not see any valid arguments, of why Kirby Lumber Co. should not pay taxes on the amount of USD 137,521.30. CHAPTER 8
DISCHARGE OF INDEBTEDNESS
Internal Revenue Code: Sections 61(a)(12): 102(a); 108(a), (b)(1), (d)(1)-
(3), (e)(1) and (5); 1017(a).
Regulations: Sections 1.61–12(a); 1.1001-2(a), 2(c) Ex. (8).
United States v. Kirby Lumber Co.*
Supreme Court of the United States, 1931.
284 U.S. 1,52 S.Ct. 4.
MR. JUSTICE HOLMES delivered the opinion of the Court.
In July, 1923, the plaintiff, the Kirby Lumber Company, issued its
own bonds for $12,126,800 for which it received their par value. Later in
the same year it purchased in the open market some of the same bonds
at less than par, the difference of price being $137,521.30. The question
is whether this difference is a taxable gain or income of the plaintiff for issue
the year 1923. By the Revenue Act of (November 23,) 1921, c. 136,
$ 213(a) gross income includes “gains or profits and income derived from
any source whatever,” and by the Treasury Regulations authorized by
$ 1303, that have been in force through repeated reenactments, “If the
corporation purchases and retires any of such bonds at a price less than
the issuing price or face value, the excess of the issuing price or face value
over the purchase price is gain or income for the taxable year.” ***. We
see no reason why the Regulations should not be accepted as a correct
statement of the law.
In Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 46 S.Ct. 449, the
defendant in error owned the stock of another company that had
borrowed money repayable in marks or their equivalent for an enterprise
that failed. At the time of payment the marks had fallen in value, which
so far as it went was a gain for the defendant in error, and it was
contended by the plaintiff in error that the gain was taxable income. But
the transaction as a whole was a loss, and the contention was denied.
Here there was no shrinkage of assets and the taxpayer made a clear
gain. As a result of its dealings it made available $137,521.30 assets
previously offset by the obligation of bonds now extinct. We see nothing
to be gained by the discussion of judicial definitions. The defendant in
error has realized within the year an accession to income, if we take
words in their plain popular meaning, as they should be taken here. ***
See Bittker and Thompson, “Income From the Discharge of Indebtedness: The Progeny
of United States v. Kirby Lumber Co.,” 66 Calif.L.Rev. 1159 (1978).
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