United States v. Kirby Lumber Co.

Holding

Cancellation of debt for less than its face amount generally produces taxable income to the debtor equal to the discount realized.

Facts

Kirby Lumber purchased its own bonds on the open market at a discount to face value and treated the discount as nontaxable.

Reasoning

Justice Holmes succinctly held that the company had freed up assets previously offset by an obligation, and the discount was a realized accession to wealth taxable as income. The principle was later codified in Section 61(a)(11) and refined by exclusions in Section 108.