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United States v. Kirby Lumber Co. - 284 U.S. 1, 52 S. Ct. 4 (1931)

Rule:

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. 

Facts:

Kirby Lumber Company (Kirby), 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. The trial court held that Kirby 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. The United States sought review in the United States Supreme Court.

Issue:

Did Kirby 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?

Answer:

Yes

Conclusion:

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 Kirby made a clear gain. As a result of its dealings, Kirby realized a certain sum previously offset by the obligation of bonds. Therefore, Kirby realized taxable income.

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