In the United States v. Kirby Lumber Co., 1931, the Supreme Court ruled that when a company buys back its bonds at a price lower than their face value, it realizes taxable income from debt discharge. The Kirby Lumber Company had issued bonds totaling over $12 million in face value but later purchased them on the open market for less than this amount. The Internal Revenue Service argued that this difference constituted income and was therefore subject to tax under federal law. The court agreed with IRS's interpretation of what constitutes "income," stating that any clear gain or economic benefit received by a taxpayer is considered as such and should be taxed accordingly.

In the dissenting opinion for United States v. Kirby Lumber Co., Justice McReynolds disagreed with the majority's view that a corporation could realize taxable income from purchasing its own bonds at a discount. He argued that this was not an accession to wealth and therefore should not be considered gross income under tax law. In his view, when the company repurchased its bonds for less than face value, it merely reduced its liabilities rather than gaining profit or capital. The difference between what was paid and face value of these obligations did not represent clear gain or economic benefit to the taxpayer but simply represented relief from existing debt obligation which is different from earning profits or gains in business operations as per traditional understanding of 'income'. Therefore, he concluded that such transactions should not be subject to taxation.