UNITED STATES v. KIRBY LUMBER CO

Citation Codes

Equivalent Citations

citation codes

Docket Number

No. 26.

Attorney(S)

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. 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. 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 F. 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 by the judgment of the market place.

Judges

Oliver Wendell Holmes

See more information ...

Smart Summary

Factual and Procedural Background

In July 1923, Kirby Lumber Company issued bonds totaling $12,126,800 at their par value. Later that year, the company purchased some of these bonds on the open market for less than their par value, resulting in a difference of $137,521.30. The dispute centers on whether this difference constitutes taxable gain or income under the Revenue Act of 1921. The Court of Claims had allowed a claim for a refund of money collected as income tax, which the United States sought to review by certiorari.

Legal Issues Presented

Whether the difference between the par value of bonds originally issued by the corporation and the lesser amount paid by the corporation to retire those bonds constitutes taxable gain or income under the Revenue Act of 1921.

Arguments of the Parties

Respondent's Arguments (Kirby Lumber Co.)

No income was derived from the transaction; it was an expenditure rather than a receipt of money.
Based on precedent, a corporation does not realize taxable income by settling a debt for less than the amount owed in dollars, as decided in Bowers v. Kerbaugh-Empire Co.
The Board of Tax Appeals had consistently held that cancellation of indebtedness in such circumstances does not result in income but is a capital transaction.
Income does not include transactions unrelated to corporate activities that only affect the capital structure.
The transaction was effectively a purchase of the corporation's own promise to pay; income is realized only by sale or disposition of capital assets, not by purchase.

Petitioner's Arguments (United States)

The opinion does not contain a detailed account of the United States' arguments beyond the brief mention of the Assistant Attorney General's representation and the statutory and regulatory provisions cited by the Court.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bowers v. Kerbaugh-Empire Co., 271 U.S. 170	Corporation does not realize taxable income by settling debt for less than the amount owed when the overall transaction is a loss.	Distinguished from the present case where the taxpayer realized a clear gain; thus, Bowers did not control the outcome here.
Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185	Income excludes transactions unrelated to corporate activities that only affect capital structure.	Referenced by respondent but the Court found the present transaction to be an accession to income nonetheless.
Burnet v. Sanford Brooks Co., 282 U.S. 359, 364	Plain popular meaning of income as an accession to wealth.	Supported the Court's conclusion that the taxpayer realized income in the plain meaning of the term.

Court's Reasoning and Analysis

The Court analyzed the transaction under the Revenue Act of 1921 and the Treasury Regulations, which explicitly define gain or income when a corporation purchases and retires its own bonds at a price less than their issuing price or face value. The Court found these regulations to be a correct statement of the law. It distinguished the case from Bowers v. Kerbaugh-Empire Co., where the overall transaction was a loss, whereas here the taxpayer made a clear gain by extinguishing an obligation for less than its original value. The Court emphasized that the taxpayer realized an accession to income in the taxable year, consistent with the plain and popular meaning of income. The Court rejected the respondent's argument that the transaction was merely a capital restructuring without income realization.

Holding and Implications

Judgment reversed.

The Court held that the difference between the issuing price of the bonds and the lesser price paid by Kirby Lumber Company to retire them constituted taxable gain or income under the Revenue Act of 1921. The direct effect is that Kirby Lumber Company is liable for income tax on the $137,521.30 gain. The opinion does not establish a new precedent beyond affirming the validity of the Treasury Regulations and clarifying the application of income taxation to bond retirement transactions.

Show full summary ...

UNITED STATES v. KIRBY LUMBER CO.

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. 71 Ct. Cls. 290; 44 F.2d 885, reversed.

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 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." 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 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.

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 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.

Judgment reversed.