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UNITED STATES v. KIRBY LUMBER CO.


No. 26
SUPREME COURT OF THE UNITED STATES
284 U.S. 1; 52 S. Ct. 4; 76 L. Ed. 131; 1931 U.S. LEXIS 457; 2 U.S. Tax Cas. (CCH)
P814; 10 A.F.T.R. (P-H) 458
October 21, 1931, Argued
November 2, 1931, Decided
PRIOR HISTORY: [***1] CERTIORARI TO THE COURT OF CLAIMS.
CERTIORARI, 283 U.S. 814, to review a judgment allowing a claim for refund of money collected as income tax.
DISPOSITION: 71 Ct. Cls. 290; 44 F.2d 885, reversed.
CASE SUMMARY:
PROCEDURAL POSTURE: The United States sought certiorari review of a judgment from the United States Court
of Claims, which held that respondent taxpayer did not realize a taxable gain from the purchase of its own bonds on the
open market at less than their par value, which it had received when it issued them.
OVERVIEW: The trial court held that respondent taxpayer did not realize a taxable gain from the purchase of its own
bonds on the open market at less than their par value, which it had received when it issued them. Upon the petition for
certiorari review by the United States, the United States Supreme Court reviewed 213(a) of the Revenue Act of
November 23, 1921, and held that gross income included gains or profits and income derived from any source
whatever. By the Treasury Regulations authorized by statute, if a corporation purchased and retired any 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 was
income for the taxable year. The Court found no reason to disregard the regulations. There was no shrinkage of assets,
and respondent made a clear gain. As a result of its dealings, respondent realized a certain sum previously offset by the
obligation of bonds. Therefore, respondent realized taxable income.
OUTCOME: The court reversed a judgment holding that respondent taxpayer did not realize a taxable gain from the
purchase of its own bonds on the open market for less than it had received for them. The court concluded that
respondent made a clear gain in a certain amount previously offset by the obligation of bonds.
CORE TERMS: Revenue Act, own bonds, par value, taxable gain, face value, issuing
LexisNexis(R) Headnotes
Tax Law > Federal Income Tax Computation > Gross Income (IRC sec. 61)
Tax Law > Federal Taxpayer Groups > C Corporations > Earnings & Profits (IRC secs. 312, 316) > General
Overview
Page 1
Tax Law > State & Local Taxes > Income Tax > General Overview
[HN1] By 213(a) of the Revenue Act of 1921 gross income includes gains or profits and income derived from any
source whatever.
Administrative Law > Agency Rulemaking > Rule Application & Interpretation > General Overview
Tax Law > Federal Income Tax Computation > Deductions for Business Expenses > General Overview
Tax Law > Federal Taxpayer Groups > Individuals > Adjustments to Income (IRC secs. 62, 71, 215, 911) > Adjusted
Gross Income (IRC sec. 62)
[HN2] By the Treasury Regulations authorized by the Revenue Act of 1921, 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. Treas.
Reg. 62, art. 545(1)(c) under Revenue Act of 1921; Treas. Reg. 45, art. 544(1)(c) under Revenue Act of 1918; Treas.
Reg. 65, art. 545(1)(c) under Revenue Act of 1924; Treas. Reg. 69, art. 545(1)(c) under Revenue Act of 1926; Treas.
Reg. 74, art. 68(1)(c) under Revenue Act of 1928. Therefore, there is no reason why the regulations should not be
accepted as a correct statement of the law.
LAWYERS' EDITION HEADNOTES:
[**LEdHN1]
INCOME TAXES, 15
income subject -- gain through purchase of own bonds. --
Headnote:[1]
Gain to a corporation by purchasing and redeeming its bonds at a price less than that for which it had sold them is
taxable income.
[**LEdHN2]
STATUTES, 165
construction -- giving words ordinary meaning. --
Headnote:[2]
In determining what is "gain or profits" subject to Federal income tax, such terms should be given their plain popular
meaning.
SYLLABUS
Where a corporation purchased and retired some of its own bonds for less than their par value, which it had received for
them when issued, the difference was a taxable gain or income under the Revenue Act of 1921. P. 3.
COUNSEL: Assistant Attorney General Rugg, with whom Solicitor General Thacher and Messrs. Fred K. Dyar,
Bradley B. Gilman, Erwin N. Griswold, Paul D. Miller, Clarence M. Charest, and T. H. Lewis, Jr., were on the brief, for
the United States.
Mr. Robert Ash for respondent.
No income was derived from the transaction, which was the expenditure rather than the receipt of money.
Page 2
284 U.S. 1, *; 52 S. Ct. 4;
76 L. Ed. 131, **; 1931 U.S. LEXIS 457, ***1
The principle involved has been decided in Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, wherein it was held that a
corporation does not realize taxable income by settling a debt for a lesser sum in dollars than it was obligated to pay.
[***2] The Board of Tax Appeals in many cases, beginning with Independent Brewing Co., 4 B. T. A. 870, has held
that no income is realized in the circumstances here involved.
Cancellation of indebtedness is a capital transaction which does not result in income. United States v.
Oregon-Washington R. & N. Co., 251 Fed. 211; Meyer Jewelry Co., 3 B. T. A. 1319; John F. Campbell Co., 15 B. T. A.
458; 50 F.2d 487; Eastside Mfg. Co., 18 B. T. A. 461; Progress Paper Co., 20 B. T. A. 234; Herman Senner, 22 B. T. A.
655.
Income does not mean transactions not connected with the corporate activities and which only affect the capital
structure of the corporate taxpayer. Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185.
The transaction is a purchase by the taxpayer of its promise to pay. It is settled that income can be realized only by the
sale or other disposition of capital assets. If income could be realized by purchase, every "good bargain" is taxable
when made. Purchase could not result in income in this case, because bonds were purchased at their then value, as
shown [***3] by the judgment of the market place.
JUDGES: Hughes, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone, Roberts
OPINION BY: HOLMES
OPINION
[*2] [**132] MR. JUSTICE HOLMES delivered the opinion of the Court.
[**LEdHR1] [1]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 the year 1923. [HN1] By the Revenue [*3] Act of (November 23,) 1921, c. 136, 213 (a) gross
income includes "gains or profits and income derived from any source whatever," and [HN2] by the Treasury
Regulations authorized by 1303, that have been in force through repeated reenactments, "If the corporation purchases
and retires any of such [***4] 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." Article 545 (1) (c) of Regulations 62, under
Revenue Act of 1921. See Article 544 (1) (c) of Regulations 45, under Revenue Act of 1918; Article 545 (1) (c) of
[**133] Regulations 65, under Revenue Act of 1924; Article 545 (1) (c) of Regulations 69, under Revenue Act of
1926; Article 68 (1) (c) of Regulations 74, under Revenue Act of 1928. We see no reason why the Regulations should
not be accepted as a correct statement of the law.
[**LEdHR2] [2]In Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 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 [***5] 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. Burnet v. Sanford
& Brooks Co., 282 U.S. 359, 364.
Page 3
284 U.S. 1, *; 52 S. Ct. 4;
76 L. Ed. 131, **; 1931 U.S. LEXIS 457, ***1
Judgment reversed.
Page 4
284 U.S. 1, *3; 52 S. Ct. 4;
76 L. Ed. 131, **LEdHR2; 1931 U.S. LEXIS 457, ***5