## Facts

- In 1923, Kirby Lumber Co. issued its own bonds with an aggregate par value of $12,126,800 and received par value in exchange.
- Later in 1923, Kirby repurchased and retired some of those bonds in the open market for less than par.
- The difference between the issue price (or face value) and the repurchase price was $137,521.30.
- Treasury Regulations under the Revenue Act of 1921 treated the excess of face (or issue) value over the repurchase price, when bonds are purchased and retired below face, as gain or income for the taxable year.
- Kirby paid the tax assessed on the $137,521.30 amount and sued for a refund in the Court of Claims.
- The Court of Claims ruled for Kirby and awarded the refund; the United States sought Supreme Court review.

## Issues

1. Whether, under § 213(a) of the Revenue Act of 1921 and applicable Treasury Regulations, a corporation realizes taxable income when it repurchases and retires its own bonds for less than the amount received upon issuance.
2. Whether the bond repurchase discount should be excluded from income based on reasoning applied in earlier cases involving debt repayment where the overall transaction produced a loss.

## Decision

- The Supreme Court reversed the Court of Claims.
- The Court held that Kirby realized taxable income of $137,521.30 in 1923 by purchasing and retiring its bonds for less than their issuing price or face value.
- The Court accepted the Treasury Regulation treating the discount as taxable gain or income as a correct statement of the law.
- The Court distinguished prior precedent involving overall transactional loss, concluding it did not control where the taxpayer experienced a clear economic gain and no shrinkage of assets.

## Legal Principles

- Gross income under § 213(a) of the Revenue Act of 1921 includes gain realized when a taxpayer’s debt is discharged for less than the amount originally incurred.
- When a corporation retires its own bonds for less than the issuing price or face value, the excess of issuing price or face value over the retirement price is taxable income for that year.
- The economic effect of the transaction controls: extinguishing a liability for less than its carrying amount frees assets previously offset by the obligation, creating taxable gain even without a cash receipt.
- A case addressing discounted debt repayment does not preclude income recognition where the taxpayer does not suffer an overall loss and instead realizes a net economic increase in assets.

## Conclusion

A corporation that repurchases and retires its own bonds for less than the amount received at issuance realizes taxable income equal to the discount, because the transaction extinguishes a liability and leaves the corporation with a net increase in assets.


United States v. Kirby Lumber Co., 284 U.S. 1 (1931)