The Internal Revenue Code of 1939 permits a taxpayer to deduct,
through amortization, the premium he has paid in purchasing
corporate bonds, and § 125 provides that the amount to be amortized
"shall be determined . . . with reference to the amount payable on
maturity or on earlier call date." In 1953, prior to December 1,
taxpayers purchased at a premium corporate bonds which were
callable on 30 days' notice, either at a "general call price" or at
a lower "special call price," and elected on their 1953 income tax
returns to claim deductions for bond premiums computed with
reference to the 30-day call period and the special call price.
Held: they were entitled to do so, since the special
call price at which the bonds here involved could be redeemed from
a limited sinking fund and from other special funds made available
upon the occurrence of certain contingent events was an "amount
payable . . . on earlier call date" within the meaning of § 125,
and there was no basis in the statute, in the legislative history,
or in the Commissioner's prior interpretations of the statute for a
distinction between a reference to a general or special call price
in computing amortizable bond premiums under the 1939 Code. Pp.
369 U. S.
673-688.
289 F.2d 69, reversed.
Page 369 U. S. 673
Mr. CHIEF JUSTICE WARREN delivered the opinion of the Court.
Despite the seemingly complex factual composition of the two
cases consolidated herein, [
Footnote 1] this opinion deals with a relatively simple
question of taxation: the extent to which a taxpayer may deduct,
through amortization under the Internal Revenue Code of 1939, the
premium he has paid in purchasing corporate bonds. In 1953, prior
to December 1, the petitioners purchased fully taxable utility
bonds at a premium above maturity value. [
Footnote 2] The bonds were callable at the option of
the issuer at either a general or special call price, and, at
either price, they were callable upon 30 days' notice. The term
"general call price" is used to designate the price at which the
issuer may freely and unconditionally redeem all or any portion of
the outstanding bonds from its general funds. The lower, "special
call price," is the amount the issuer would pay if the bonds were
redeemed with cash from certain specially designated funds.
[
Footnote 3]
Page 369 U. S. 674
In computing net income, the 1939 Code permits a taxpayer to
deduct, through amortization, the premium he has paid in purchasing
corporate bonds. [
Footnote 4]
Section 125 of the Code, set forth in pertinent part in the margin,
[
Footnote 5] provides
Page 369 U. S. 675
that the amount of bond premium to be amortized "shall be
determined . . . with reference to the amount payable on maturity
or on earlier call date." Pursuant to this Section, the petitioners
elected to claim on their 1953 income tax returns a deduction for
bond premium amortization computed with reference to the special
redemption price and to the 30-day redemption period appearing in
the bond indentures. The respondent did not question the
petitioners' use of the 30-day amortization period, but he
disallowed the computation based upon the special redemption price
and recomputed the amount of bond premium using the higher, general
call price. [
Footnote 6] The
Court of Appeals for the Second Circuit
Page 369 U. S. 676
affirmed the Tax Court's orders sustaining the Commissioner's
deficiency determination. 289 F.2d 69. However, in cases presenting
the identical legal issue, the Courts of Appeals for the Third
(
Evans v. Dudley, 295 F.2d 713) and Sixth (
United
States v. Parnell, 272 F.2d 943,
affirming 187
F.Supp. 576) Circuits allowed amortization taken with reference to
the special redemption prices. [
Footnote 7] To resolve this conflict, we granted
certiorari. 368 U.S. 812.
Page 369 U. S. 677
Bond premium is the amount a purchaser pays in buying a bond
that exceeds the face or call value of the bond. [
Footnote 8] When a bond sells at a premium,
it is generally because the interest it bears exceeds the rate of
return on similar securities in the current market. For the right
to receive this higher interest rate, the purchaser of a bond pays
a premium price when making the investment. However, interest is
taxable to the recipient, and when a premium has been paid, the
actual interest received is not a true reflection of the bond's
yield, but represents in part a return of the premium paid. It was
to give effect to this principle that Congress, in 1972, enacted
Section 125 of the 1939 Code, [
Footnote 9] which for the first time provided for
amortization of bond premium for tax purposes.
Page 369 U. S. 678
By providing that amortization could be taken with reference to
the "amount payable on maturity or on
earlier call date"
(emphasis added), Congress recognized that bonds are generally
subject to redemption by the issuer prior to their maturity. In
electing to allow amortization with reference to the period the
bonds might actually be outstanding, Congress, through the words to
which we have lent emphasis, provided that a bondholder could
amortize bond premium with reference to any date named in the
indenture at which the bond might be called. [
Footnote 10]
A bond indenture might contain any number of possible call
dates, but we need only to be concerned in this case with the
issuer's right to call the bonds on 30 days' notice at either a
general or special call price. Unquestionably, both general and
special redemption provisions have a legitimate, though distinct,
business purpose, and both were in widespread use well before the
enactment of Section 125. The general call price is employed when
the issuer finds that the current rate of interest on marketable
securities is substantially lower than what it is paying on
Page 369 U. S. 679
an outstanding issue. The issuer may then call the bonds at the
general price and, following redemption, may refinance the
obligation at the lower, prevailing rate of interest. In contrast,
the provision for special funds from which bonds may be redeemed at
the special call price serves an entirely different purpose. Bond
indentures normally require the issuer to protect the underlying
security of the bonds by maintaining the mortgaged property and by
insuring that its value is not impaired. This is done first through
the maintenance of a special sinking fund, to which the issuer is
obligated to make periodic payments and, secondly, through the
maintenance of other special funds to which are added the proceeds
from a sale or destruction of mortgaged property or from its loss
through a taking by eminent domain. [
Footnote 11] Although the issuer normally reserves an
alternative to maintaining these special funds with cash,
circumstances may dictate that the only attractive option from a
business standpoint is the payment of cash, and, to prevent the
accumulation of this idle money, the indenture provides that the
issuer may use it to redeem outstanding bonds at a special call
price. It is evident that, just as prevailing market conditions may
render redemption at the special call price unlikely at a given
time, the same or different market conditions may also cause
redemption at the general call price equally unlikely, [
Footnote 12] particularly in an
expanding
Page 369 U. S. 680
industry such as utilities. During the period the petitioners
held their bonds, none was called at either price, but the risk
incurred that they would be called was present with equal force as
to both the general and special call provisions. The market for
bonds reflects that risk, and the Section of the Code we are asked
to interpret takes cognizance of that market reality.
Turning to the specific problem in the instant case, we are
asked to determine whether the special price at which the bonds may
be redeemed by the issuer from the limited sinking fund account and
from the other special funds made available upon the occurrence of
certain contingent events (
see note 3 supra) is an "amount payable . . . on
earlier call date" within the meaning of Section 125. For the
reasons stated below, we answer this question affirmatively, and
hold that there is no basis either in the statute, in the
legislative history, or in the respondent's own prior
interpretations of the statute, for a distinction between reference
to a general or special call price in computing amortizable bond
premiums under the 1939 Code.
First, we note that the Government has made certain important
concessions which lighten considerably the task before us. It does
not question the right of the petitioners to amortize bond premium
with reference to the 30-day call period, nor does it question
amortization to the general call price. [
Footnote 13] In addition, in requesting a rule
Page 369 U. S. 681
which will apply to the "generality of cases," [
Footnote 14] it professes to have abandoned
its argument below which became the rationale of the Second Circuit
in holding against the taxpayers, that the statute calls for an
analysis into the "likelihood of redemption" before amortization at
a special call price will be permitted. [
Footnote 15] Moreover, the
Page 369 U. S. 682
Government does not contend that the transactions entered into
by the petitioners were a sham, without any business purpose except
to gain a tax advantage. [
Footnote 16] Rather, the Government's position in this
Court is that, before an "earlier call date" is established with
reference to the special call price, the taxpayer must show that
"there is an ascertainable date on which the issuer will become
entitled to redeem [a particular] bond at its option." The
Government asserts that it is not enough that the issuer has the
right to call some bonds at the special redemption price. Rather,
"[i]t must have the right to call the particular bond for which
amortization is claimed, for otherwise
that bond has no
earlier call date.'" The Government's primary reason for urging
this interpretation of Section 125 is that the statute has created
a tax loophole of major dimension that should be closed short of
allowing the deduction sought in this case. While this assertion
might have been persuasive in securing enactment of the amendments
to the statute made subsequent to the time the transactions
involved here took place (see discussion
infra), it
may not, of course, have any impact upon our interpretation of the
statute under review. We are bound by the meaning of the words used
by Congress, taken in light of the pertinent legislative history.
In neither do we find support for the Government's
interpretation.
This Court was first called upon to construe Section 125 in 1950
in
Commissioner v. Korell, 339 U.
S. 619. The
Page 369 U. S. 683
taxpayer there had purchased bonds at a premium which reflected
in large part not a higher yield of interest, but, rather, the
attractiveness of the convertible feature of the bonds. The bonds
were callable on 30 days' notice, and the taxpayer amortized the
premium accordingly. In contesting the deduction thus taken, the
Commissioner contended that Section 125, in establishing a
deduction for "amortizable bond premium," did not include premium
paid for the conversion privilege. In rejecting this contention,
the Court made it clear that Section 125 was not enacted solely to
enable a bondholder to amortize "true premium," but that, by "the
clear and precise avenue of expression actually adopted by the
Congress" (339 U.S. at
339 U. S.
625), the legislation was adopted with "no distinctions
based upon the inducements for paying the premium." (
Id.
at
339 U. S.
628).
The decision in
Korell led to congressional
reexamination of Section 125, and the enactment of Section 217(a)
of the Revenue Act of 1950 (64 Stat. 906), which eliminated
amortization of bond premiums attributable to a conversion feature.
However, response to the
Korell decision was specifically
limited to the convertible bond situation; no further change was
made in the statute which would reflect on its interpretation in
the case before us. [
Footnote
17]
Page 369 U. S. 684
In 1954, in enacting the successor to Section 125, Section 171
of the Internal Revenue Code of 1954 (26 U.S.C., 1958 ed.),
Congress again took cognizance of the tax benefit in question, and
determined to eliminate the abuses inherent in permitting
amortization with reference to 30-day call periods. Thus, Congress
further narrowed the loophole by providing that the premium on
callable bonds could be amortized to the nearest call date only if
such date was more than three years from the date of the original
issue of the securities. With particular relevance to the
Government's argument in the instant case, it is worthy of note
that Congress understood the operation of the statute to the
taxpayer's advantage, but limited correction of the abuses inherent
in it to elimination of the quick write-off. The House Report
accompanying H.R. 8300, which was to become the Internal Revenue
Code of 1954, stated (H.R.Rep. No. 1337, 83d Cong., 2d Sess.
26):
"Under existing law, a bond premium may be amortized with
reference to the amount payable on maturity or on earlier call date
at the election of the taxpayer. In the case of bonds with a very
short call feature, such as those providing for call at any time on
30-day notice, the entire premium may be deducted in the year of
purchase."
"This provision has given rise to tax avoidance opportunities.
Substantial bond issues have been made subject to a 30-day call,
permitting the purchaser to take an immediate deduction for the
entire premium against ordinary income.
Where the call feature
is nominal or inoperative, this permits a
Page 369 U. S. 685
deduction for an unreal loss, since the market value of the
bonds ordinarily remains fairly stable over considerable periods.
The bonds may then be resold after 6 months subject to long-term
capital gain treatment. The writeoff of premium thus affords a
gratuitous tax saving, equivalent to the conversion of a
corresponding amount of ordinary income into capital gain. This
process may be repeated indefinitely."
"To curb this type of abuse, your committee's bill provides that
the premium on callable bonds may be amortized to the nearest call
date only if such date is more than 3 years from the date of
original issue of the securities.
This provision will apply
only to bonds issued after January 22, 1954, and acquired after
January 22, 1954."
(Emphasis added.) Not only did Congress fail to make the
distinction between general and special call provisions urged by
the respondent, but it expressly recognized that deductions could
be taken under Section 125 with reference to a call date that was
"nominal or inoperative." It did not remotely imply that a showing
of a right to call all or any part of the outstanding bonds was
necessary for operation of the statute. Furthermore, the change
that it did adopt was to operate prospectively only.
Finally, in 1958, by adoption of Section 13 of the Technical
Amendments Act of 1958, 72 Stat. 1610, Congress eliminated entirely
the right to amortize to call date, permitting amortization to be
taken only over the period to maturity. [
Footnote 18] Again, the legislative change was
prospective
Page 369 U. S. 686
only, and again no distinction was made with respect to general
and special call dates or with respect to a right to call all or a
part of the outstanding bonds.
Persuasive evidence that we are correct in our interpretation of
Section 125, as bolstered by its legislative history and subsequent
amendments, may be found in the respondent's own prior construction
of the statute. As is true with the language of the statute itself,
the respondent's regulations contained not the slightest hint of
the distinction urged upon us here. The Commissioner defined
"earlier call date" in Treas.Reg. 118, § 39.125(b)-2 (
see
note 10 supra) as
any call date prior to maturity, specified in the bond. The
regulations in effect in 1953 give no support to the Government's
present contention that the taxpayer must show an unconditional
right in the issuer to call the outstanding bonds at a particular
redemption price before amortization with reference to that price
would be permitted. Furthermore, although the petitioners are not
entitled to rely upon unpublished private rulings which were not
issued specifically to them, [
Footnote 19] such rulings do reveal the interpretation
put upon the statute by the agency charged with the responsibility
of administering the revenue laws. And, because the Commissioner
ruled, in letters addressed to taxpayers requesting them, that
amortization with reference to a special call price was proper
under the statute, [
Footnote
20] we have
Page 369 U. S. 687
further evidence that our construction of allowable bond premium
amortization is compelled by the language of the statute. [
Footnote 21]
A firmly established principle of statutory interpretation is
that "the words of statutes -- including revenue acts -- should be
interpreted where possible in their ordinary, everyday senses."
Crane v. Commissioner, 331 U. S. 1,
331 U. S. 6.
[
Footnote 22] The statute in
issue here, in plain and ordinary language, evidences a clear
congressional intent to allow amortization with reference to any
call date named in the indenture. Under such circumstances, we are
not at liberty, notwithstanding the apparent tax saving windfall
bestowed upon taxpayers, to add to or alter the words employed to
effect a purpose which does not appear on the face of the statute.
Moreover, the legislative history, too, is persuasive evidence that
the statute, as it appeared
Page 369 U. S. 688
in 1953 when these deductions were taken, allowed the deduction
refused these taxpayers. Simply stated, an informed Congress
enacted Section 125 with full realization of the existence and
operation of special call provisions, but chose not to make any
distinction between them and general redemption rights. Neither did
the Commissioner. Nevertheless, the Government now urges this Court
to do what the legislative branch of the Government failed to do or
elected not to do. This, of course, is not within our province.
[
Footnote 23]
The judgment is reversed.
MR. JUSTICE FRANKFURTER took no part in the decision of this
case.
MR. JUSTICE WHITE took no part in the consideration or decision
of this case.
[
Footnote 1]
We have before us two cases which originated in the Tax Court:
Estate of Gourielli v. Commissioner, 33 T.C. 357, and
Goldfarb v. Commissioner, 33 T.C. 568. The cases were
consolidated on appeal to the Court of Appeals for the Second
Circuit, and one opinion was filed by that court.
Estate of
Gourielli v. Commissioner, 289 F.2d 69. Petitioner Hanover
Bank is the executor of the estate of Mr. Gourielli, who passed
away since the commencement of this action.
[
Footnote 2]
The bonds involved in the
Gourielli case were
Appalachian Electric Power Company, 1981 series, bonds, which
decedent and his wife purchased for $117.50 per $100 face value,
and which were later sold for $115.50. The bonds in Goldfarb were
Arkansas Power & Light Company, 30-year, Eighth Series, bonds,
which petitioners purchased at an average price of 110.50 per $100
face amount, and which were later sold at an average price of
$105.40. The total purchases in the two cases were $540,000
(
Gourielli) and $500,000 (
Goldfarb) face amount;
the purchase prices were paid in cash in both cases.
[
Footnote 3]
In addition to a "sinking fund" into which the indenture
required Appalachian to deposit during each annual period an amount
(in cash or property additions of an equipment amount) equal to one
per cent of the bond issue, the special funds in the case of the
Appalachian bonds were: (1) a release property and insurance fund,
to which deposits were required only upon a loss by casualty or by
a release of mortgaged properties securing the bonds; and (2) a
maintenance fund, to which deposits were required only when
Appalachian failed to expend a stated percentage of its revenues on
maintenance or improvements. The special funds in the case of the
Arkansas bonds were made up from the same type contributions as
above, plus additions made to an eminent domain fund if and when
mortgaged property was taken from the company by eminent domain
proceedings.
[
Footnote 4]
Internal Revenue Code of 1939 (26 U.S.C., 1952 ed.):
"SEC. 23. DEDUCTIONS FROM GROSS INCOME."
"In computing net income there shall be allowed as
deductions:"
"
* * * *"
"(v) [as added by § 126(a), Revenue Act of 1942, c. 619, 56
Stat. 798] BOND PREMIUM DEDUCTION. -- In the case of a bondholder,
the deduction for amortizable bond premium provided in section
125."
[
Footnote 5]
This Section was also added by the Revenue Act of 1942,
supra, note 4 §
126(b). Entitled "Amortizable Bond Premium," it reads in pertinent
part as follows:
"(a) GENERAL RULE. -- In the case of any bond, as defined in
subsection (d), the following rules shall apply to the amortizable
bond premium (determined under subsection (b)) on the bond for any
taxable year beginning after December 31, 1941:"
"
* * * *"
"(b) AMORTIZABLE BOND PREMIUM. --"
"(1) AMOUNT OF BOND PREMIUM. -- For the purposes of paragraph
(2), the amount of bond premium, in the case of the holder of any
bond, shall be determined with reference to the amount of the basis
(for determining loss on sale or exchange) of such bond, and with
reference to the amount payable on maturity or on earlier call
date, with adjustments prior to reflect unamortized bond premium
with respect to the bond, for the period prior to the date as of
which subsection (a) becomes applicable with respect to the
taxpayer with respect to such bond. . . ."
"(2) AMOUNT AMORTIZABLE. The amortizable bond premium of the
taxable year shall be the amount of the bond premium attributable
to such year."
"(3) METHOD OF DETERMINATION. -- The determinations required
under paragraphs (1) and (2) shall be made --"
"(A) in accordance with the method of amortizing bond premium
regularly employed by the holder of the bond, if such method is
reasonable;"
"(B) in all other cases, in accordance with regulations
prescribing reasonable methods of amortizing bond premium,
prescribed by the Commissioner with the approval of the
Secretary."
[
Footnote 6]
[
Footnote 7]
In addition to the Third and Sixth Circuits' cases, the First
and Seventh Circuits have also allowed deductions of bond premium
amortization taken with reference to special redemption prices. In
the First Circuit:
Fabreeka Products Co. v. Commissioner,
294 F.2d 876,
vacating and remanding 34 T.C. 290;
Sherman v. Commissioner, 34 T.C. 303; and
Friedman v.
Commissioner, 34 T.C. 456. In the Seventh Circuit:
Gallun
v. Commissioner, 297 F.2d 455,
reversing 1960 P-H
T.C. Memo. Dec. 60,104; and
Maysteel Products, Inc. v.
Commissioner, 287 F.2d 429,
reversing 33 T.C. 1021.
In each of these cases, the taxpayer had purchased bonds at a
premium, amortized that premium to the special call price, and
thereafter made a distribution of the bonds which entailed a double
tax deduction (
e.g., a gift to charity). In each case, the
Court of Appeals allowed the double deduction. Although the precise
issue presented in the instant case was not expressly decided in
these latter cases, due to the fact that the Commissioner did not
choose to challenge the use of the special call price as against
the general call price for determining the amount of the premium,
the allowance of the amortization to the special redemption price
impliedly places the First and Seventh Circuits in accord with the
Third and Sixth Circuits.
[
Footnote 8]
See the authorities collected in
Commissioner v.
Korell, 339 U. S. 619,
339 U. S. 627,
n. 10. The Court in
Korell, a case also involving an
interpretation of Section 125 (
see discussion, pp.
369 U. S.
682-683,
infra), concluded (339 U.S. at
339 U. S.
627): "We adopt the view that
bond premium' in § 125
means any extra payment, regardless of the reason therefor. . .
."
[
Footnote 9]
Commissioner v. Korell, 339 U.
S. 619,
339 U. S. 621.
See 1 Hearings before House Committee on Ways and Means on
Revenue Revision of 1942, 77th Cong., 2d Sess. 90 (1942). The House
Committee noted the recommendation made in the hearings that the
difference between yield and the actual interest rate be treated as
a return of capital and not as a capital loss (H.R.Rep. No. 2333,
77th Cong., 2d Sess. 47):
"Under existing law, bond premium is treated as a capital loss
sustained by the owner of the bond at the time of disposition or
maturity and periodical payments on the bond at the nominal or
coupon rate are treated in full as interest. The want of statutory
recognition of the sound accounting practice of amortizing premium
leads to incorrect tax results which in many instances are so
serious that provision should be made for their avoidance."
However, in rejecting the Government's argument in
Korell,
supra, that Congress intended to confine the deduction only to
premium paid for a "higher than market" interest rate, the Court
stated (339 U.S. at
339 U. S.
626-627):
"At most, [the Commissioner's] presentation of the legislative
materials suggests that Congress may have had the bondholder who
was seeking a higher interest rate primarily in mind; but it does
not establish that Congress in fact legislated with reference to
him exclusively. [Citation omitted.] Congress, and the Treasury in
advising Congress, may well have concluded that the best manner of
affording him relief and correcting the inequitable treatment of
bondholders whose interest receipts were taxable was to define the
scope of the amendment by reference to types of bonds, rather than
causes of premium payment."
[
Footnote 10]
Congress' intent in this regard was expressly noted by the
respondent in enacting Treas.Reg. 118, § 39.125(b)-2:
"
Callable and convertible bonds. (a) The fact that a
bond is callable . . . does not, in itself, prevent the application
of section 125. . . . The earlier call date may be the earliest
call date specified in the bond as a day certain, the earliest
interest payment date if the bond is callable at such date, the
earliest date at which the bond is callable at par, or such other
call date, prior to maturity, specified in the bond as may be
selected by the taxpayer. . . ."
[
Footnote 11]
See generally Evans v. Dudley, 295 F.2d 713, 715;
Estate of Gourielli v. Commissioner, 289 F.2d 69, 73;
Parnell v. United States, 187 F.
Supp. 576, 577,
aff'd, 272 F.2d 943.
See also
Badger, Investment Principles and Practices (5th ed. 1961), 46-47,
114-115, 129; I Dewing, Financial Policy of Corporations (5th ed.
1953), 186-188, 247-249.
[
Footnote 12]
Hence, the occurrence of a redemption at the general call price
is dependent upon one set of events -- the fluctuation in the
interest market; the occurrence of a redemption at the special call
price is dependent upon another set of events -- deposits in the
sinking fund by the issuer over one or more years, takings by
governmental agencies through eminent domain, destruction of the
property securing the bonds, etc. In either case, the events could
happen. In fact, the petitioners point out in their brief here
that, in recent years, more bonds have been called at the special
redemption price than at the general price.
See also Evans v.
Dudley, 295 F.2d 713, 716.
[
Footnote 13]
Allowing a 30-day amortization period is in accord with the
decision of the Court in
Korell, where, although the point
was not argued by the Government, the taxpayer had amortized the
premium with reference to the 30-day period provided in the
indenture. In its brief in the instant case, the Government
states:
". . . [W]e concede that it is now too late to challenge the
amortization of the premium on bonds subject to an unlimited right
of redemption on 30 days' notice. Not only has the consistent
administrative practice, culminating in a published ruling, been to
allow such amortization, but Congress, in narrowing such deductions
in the 1954 Code and prohibiting them entirely after 1957,
expressly acknowledge that the prior law permitted that treatment.
. . . Accordingly, we did not challenge in the lower courts, and do
not challenge here, petitioners' right to amortization of the
premium on the basis of the general right of the issuer to redeem
the bonds at any time upon 30 days' notice."
See also Int.Rev.Rul. 56-398, 1956-2 Cum.Bull. 984,
where the respondent, in a published ruling, acquiesced in a 30-day
amortization period under the 1939 Code.
[
Footnote 14]
This concession also conforms to the pronouncement in
Korell (339 U.S. at
339 U. S.
625): "Congress was legislating for the generality of
cases."
See also Evans v. Dudley, 295 F.2d 713, 716;
Parnell v. United States, 187 F.
Supp. 576, 579,
aff'd, 272 F.2d 943.
[
Footnote 15]
The Court of Appeals for the Second Circuit stated (289 F.2d 69,
74):
"We do not think that, . . . in § 125 of the Code . . . ,
[Congress] meant to include an amount payable on a call at a
'special' price of which there was no real possibility during the
period for which the amortization is being taken and the deduction
claimed."
And (289 F.2d at 72): " . . . [T]he hazard that any significant
number of petitioners' bonds would be called during [the] period
was infinitesimal." In so holding, the Court accepted the
Government's argument below that
"[t]he taxpayer is not entitled to compute his amortizable bond
premium deduction . . . with reference to the 'special' call price
. . . because . . . such a call was so contingent and unlikely that
there was no realistic call date at the 'special' call price. . .
."
In contrast, the Government states in its brief here:
". . . [O]ur position is not dependent upon the particular
market conditions or the actual probabilities that a right of
redemption will be exercised. . . . [W]e agree with petitioners
that the question . . . should not be dependent upon a finding in
each case of the actual 'likelihood' that any particular redemption
right will be exercised."
As to the futility in attempting to apply a "likelihood of
redemption" standard,
see note 12 supra.
[
Footnote 16]
Cf. Knetsch v. United States, 364 U.
S. 361;
Gregory v. Helvering, 293 U.
S. 465.
[
Footnote 17]
The legislation simply provided:
"In no case shall the amount of bond premium of a convertible
bond include any amount attributable to the conversion features of
the bond."
Where, as in the case before us, a question of interpretation of
Section 125 is presented lying outside the scope of the 1950
Amendment,
Korell retains its full vitality. Thus, it is
worth noting that the Government's "right to call" approach
advocated in the case at bar would result in a
sub
silentio overruling of
Korell to the extent that in
the latter case the right of the bondholder to exercise his
conversion option at any time through the expiration of the notice
period of a call defeated completely the issuer's "right" to call
and redeem even a single bond. In the instant case, however,
neither party disputes the fact that at least some of the bonds
could have been called at the special price, and that, if the
issuer exercised his right so to call them, the bondholder would
have had no choice but to turn over the bonds and forfeit the
premium paid for them.
[
Footnote 18]
The 1958 Amendment literally permits amortization to an earlier
call date, but only if it results in a smaller amortization
deduction than would amortization to maturity, which, for all
practical purposes, effectively eliminates the privilege of calling
to an earlier call date.
[
Footnote 19]
See, e.g., Commissioner v. P. G. Lake, Inc.,
356 U. S. 260,
356 U. S.
265-266, n. 5;
Automobile Club v. Commissioner,
353 U. S. 180;
Helvering v. New York Trust Co., 292 U.
S. 455,
292 U. S.
467-468.
[
Footnote 20]
For example, the record in the instant case contains a copy of
the following letter to a taxpayer from the respondent's office (we
quote the relevant portion):
"Gentlemen:"
"
* * * *"
"The Appalachian Electric Power Company 3 3/4% bonds, 1981
Series, are callable in whole or in part through May of 1953 at 105
5/8. They are also callable for sinking fund through funds derived
from maintenance or sale of property at any time upon thirty days
notice through May 31, 1954, at 102 3/8. You request to be advised
whether the above-mentioned ruling of July 30, 1952, means that
such bonds may be amortized down to 102 3/8, or whether it means
that they can only be amortized down to 105 5/8 through May of
1953."
"Upon the basis of the information on file in this office, it is
the opinion of this office that a taxpayer electing to amortize the
premium on Appalachian Electric Power Company bonds in accordance
with section 125 of the Code may use the regular redemption price
of 105 5/8 or the special redemption price of 102 3/8."
Very truly yours, [etc.] . . .
[
Footnote 21]
In 1956, three years after the deductions in the present case
were taken, the Commissioner -- reversing the position he had
previously and uniformly adhered to in a series of private rulings
-- for the first time announced that amortization of bond premium
under Section 125 of the 1939 Code was to be limited to premium in
excess of a general call price, and could not include premium in
excess of a lower special call price, except where an actual call
was made at the latter price. Int.Rev.Rul. 56-398, 1956-2 Cum.Bull.
984.
[
Footnote 22]
See also Commissioner v. Korell, 339 U.
S. 619,
339 U. S.
627-628;
Lang v. Commissioner, 289 U.
S. 109,
289 U. S. 111;
Old Colony R. Co. v. Commissioner, 284 U.
S. 552,
284 U. S.
560.
[
Footnote 23]
We believe the Court of Appeals for the First Circuit was
correct when it said in
Fabreeka Products Co. v.
Commissioner, 294 F.2d 876, 879:
"Granting the government's proposition that these taxpayers have
found a hole in the dike, we believe it one that calls for the
application of the Congressional thumb, not the court's."
See also Evans v. Dudley, 295 F.2d 713, 715, where the
Third Circuit quotes this language from Judge Aldrich's opinion in
Fabreeka Products.