been determined by the taxpayer with reference to the 'general' call price provided for in the bonds.
The government presents the thesis that the 'special' call price may only be used if there is a reasonable advance ascertainment of the date of call.
The government's argument would place a limitation on the deduction for amortizable bond premium which finds no sanction in the statute. Thus, the statute says '* * * the amount of the amortizable bond premium for the taxable year shall be allowed as a deduction.' It defines the amount of amortizable bond premium as the difference between basis and the amount payable '* * * on maturity or on earlier call date.' 26 U.S.C.A. § 171(b)(1)(B) (Emphasis supplied.)
Nor does this limitation find any sanction in any judicial precedent. Commissioner v. Korell, 339 U.S. 619, 70 S. Ct. 905, 94 L. Ed. 1108.
It is noteworthy that the Commissioner of Internal Revenue issued a series of rulings in 1952 and 1954 which provided that taxpayers should base their amortization deduction on the 'special,' or lower, call price.Rev.Rul. 56-398, 1956-2 Cum.Bul. 984. It was not until 1956 that these rulings were reversed.
I am well aware that these rulings of the Commissioner do not bind the court, since the taxpayer admittedly was not aware of their existence and accordingly placed no reliance upon them. But, I do believe that they are relevant to demonstrate expertise interpretation of the statute and may be considered in evaluating congressional intent.
It is a common practice in issuing debentures and bonds secured by the pledge of real estate to set forth two series of call prices at which the bonds may be redeemed. These two call prices perform different functions.
The 'special' call price is a price at which bonds borrower deposits with the moneys the borrower deposits with the trustee under certain provisions of indenture. Generally, these moneys include the sinking fund deposits, the maintenance fund deposits and the deposits made against the release of property, each of which are designed to provide additional security for the holder by effecting redemptions prior to maturity, or in the alternative, by compelling the borrower to increase the value of the collateral securing the loan.
In addition, these funds serve the purpose of permitting the borrower to utilize the funds which he is required to deposit. The redemption premium is designed to provide the holder a modest reimbursement for the expense and delay he will incur in reinvesting the proceeds.
On the other hand, other provisions of the indenture are designed to permit borrowers to redeem at their discretion all, or a part, of their outstanding bonds in order to permit the borrowers to refund their debt when there is a decrease in the going rate of interest. Since the exercise of this privilege will deprive the holders of a more favorable return of interest, the redemption price provided in this connection (the 'general' call price) serves a dual purpose. It must be high enough to make a refunding economically advantageous to the borrowers only when the change in interest rate is substantial, thus protecting the holder from a refunding upon an ordinary fluctuation in the effective interest rate, i.e., in the market value of the bonds; it must also be high enough to compensate the holders in part for the loss of annual interest which they will suffer upon reinvesting their proceeds in a less favorable market. Thus the terms 'general' and 'special' refer to the nature of the call which customarily accompanies a redemption at these prices, not to some esoteric concept that might seem to make the former more 'normal' as a limiting factor in the determination of the amount of the amortization than the latter.
I can only conclude that Congress at the time that the 1954 Amendment to the Statute was considered, recognized the economic realities with reference to the bond market generally, and cognizant that 'special' calls constituted the practice in the redemption of public utility bonds during this period, Congress in the enactment of the Internal Revenue Code of 1954, limited said privilege, which limitation, however, did not have application to the dates of issuance of utility bonds purchased by the taxpayer.
I am satisfied that the method employed by the taxpayer by invoking the 'special' call price is authorized by the applicable statutes when construed in view of their wording and legislative history. Parnell vs. U.S., 58-2 U.S.T.C. par. 9881; Findings of Fact and Conclusions of Law at 187 F.Supp. 576, affirmed without opinion, 6 Cir., 272 F.2d 943.
This opinion, together with stipulations of the parties, shall constitute findings of fact and conclusions of law as required by Rule 52, Federal Rules of Civil Procedure, 28 U.S.C.A.
An appropriate order is entered.
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