Gourielli v. Commissioner

*357 The Commissioner determined a deficiency in income tax of $ 14,200.92*22 for 1953. The only issue for decision is whether the deduction for amortization of premiums on bonds under section 125(b) of the Internal Revenue Code of 1939 is limited to the excess of cost over the general redemption rate of 105.375 as contended by the Commissioner or is the excess of cost over the special redemption rate of 102.375 as contended by the petitioners.

FINDINGS OF FACT.

A. Gourielli and Helena Gourielli were husband and wife during 1953 and filed a joint income tax return for that year with the district director of internal revenue for the Upper Manhattan District of New York. The husband died before the filing of the petition and the wife survives.

Gourielli and his wife, hereafter referred to as petitioners, purchased Appalachian Electric Power Company (hereafter called Appalachian) first mortgage bonds 3 3/4 per cent, 1981 series (hereafter called the 1981 series), at 117 1/2 and sold them at 115 1/2 as shown in the following table: *358

*23 The purchases were made through a broker. The purchase price was paid in cash.

The mortgage and deed of trust securing the Appalachian bonds, as amended in section 20C, contained, inter alia, provisions here summarized as follows:

The 1981 series, issued in denominations of $ 1,000, were to mature on June 1, 1981. Interest was payable on June 1 and December 1 of each year. The company, at its option or by operation of various provisions of the mortgage and deed of trust, could redeem 1981 series bonds at any time and from time to time upon notice published in a New York newspaper at least once in each of four consecutive calendar weeks, the first publication to be at least 30 days but not more than 90 days prior to the date fixed for redemption. The redemption would be at the principal amount thereof and accrued interest to such date of redemption, together, if redeemed otherwise than by the use of cash deposited pursuant to sections 20 or 40 of the indenture and otherwise than by the use of proceeds of released property or the proceeds of insurance, with a premium equal to a percentage of the principal amount thereof determined as set forth in a schedule headed "Regular Redemption*24 Premium", and if redeemed by the use of cash deposited pursuant to sections 20 or 40 of the indenture, by the use of proceeds of released property or the proceeds of insurance, with a premium equal to a percentage of the principal amount determined as set forth in the schedule under the heading "Special Redemption Premium."

The schedule referred to contains three columns. The left-hand one headed "Year" begins with 1952 and ends with the year 1979. The next column is headed "Regular Redemption Premium" and the right-hand column is headed "Special Redemption Premium." The following appears under those two columns: "(If redeemed prior to June 1 of the calendar year stated and subsequent to the last day of May of the calendar year next preceding such year)". Opposite each year a percentage is shown under each of the other two headings. Those shown under "Regular Redemption Premium" begin with 5 3/4 per cent and decline at the rate of 1/4 per cent for some years and 1/8 for others until they reach 3/8 of 1 per cent for the year 1979. The percentages under "Special Redemption Premium" are 2 3/8 per cent for the first 3 years, 2 1/4 per cent for the next 3 years, then decline 1/8 per*25 cent at intervals until they get to be 3/8 of 1 per cent in 1979. The two columns are identical for the last 3 years, and below the schedule the following appears: "and without premium in either case if redeemed on or after June 1, 1979 and prior to maturity."

The petitioners elected to amortize the premiums paid on the bonds and claimed on their return for 1953 a deduction of $ 83,056.07 as *359 amortization of those bond premiums based upon the "special" call price. The Commissioner allowed the deduction to the extent of $ 64,831.07 and disallowed $ 18,225 of the amount claimed.

The following table shows each series of Appalachian's first mortgage bonds, all issued under the same mortgage and deed of trust applicable to the bonds here in issue:

Appalachian has never called, *26 redeemed, or owned any of the above bonds, all of which are still outstanding in the amounts as originally issued.

The company had $ 1,685,114.65 available in 1953 for the call of 1981 series bonds at the "regular redemption" price, of which $ 1,359,155.02 was "actually certified in the year following the applicable year."

The prevailing rate of interest on bonds during 1952, 1953, and 1954 never fell below the prevailing rate for 1951.

No conditions existed in 1953 which would have warranted the calling of any Appalachian bonds. The business of the company was then expanding and its debt was increasing. The only fund which Appalachian could have used in 1953 to retire any part of the 1981 series at the "special redemption" price was "Releases (Cash) $ 42,626.30" which was withdrawn by the company on April 6, 1955. There was no likelihood that the debtor would consider redeeming any of the 1981 series during 1953.

All stipulated facts are incorporated herein by this reference.

OPINION.

Section 125 entitled "Amortizable Bond Premium" allows deductions through amortization of premiums paid on bonds, the interest of which is wholly taxable. The amortizable premium here is the excess*27 of the cost over "the amount payable on maturity or on earlier call date," here on a call date long prior to maturity. The cost of these bonds subject to amortization is stipulated, the total cost of the bonds, including commissions paid at that time. The parties disagree only as to the amount by which these *360 bonds can be amortized, the amount payable on a call date prior to maturity. They were actually sold at a profit since the basis was reduced by the amortization allowed, although they were sold for less than their original cost. The attraction presumably of the petitioners' investment in these Appalachian bonds was to obtain short-term capital gains to offset already realized short-term capital losses.

The question is -- which of two redemption prices, each exercisable on the same call date, is to be used in computing a deduction for amortization of bond premiums. That question is not recognized or dealt with directly in section 125, its legislative history, or the regulations. The Commissioner has allowed amortization of the bond premiums to the extent that the cost exceeds the "regular redemption" price. He not only does not argue that he was wrong in allowing*28 that amount to be amortized but he affirmatively contends that the deduction of the excess of cost over the "regular redemption" price is proper. Cf. Commissioner v. Korell, 339 U.S. 619. He disallowed as a deduction the difference between the higher "regular" and the lower "special redemption" prices, and he contends that that disallowance was proper. However, he makes no argument in his briefs against the amortization of the excess of the cost over the "special redemption" price that is persuasive or that would not apply as well to the amortization which he has allowed. The petitioners have failed to advance any adequate reason for amortizing the difference between cost and the "special redemption" price. In other words, neither party has supported its contention by a persuasive argument. The Tax Court has no justification for changing the Commissioner's determination since it is presumed to be correct and the burden of proving otherwise is upon the petitioners.

The Court is not persuaded that these petitioners, who held these bonds for only 35 days, are entitled under this regulation to deduct the difference between cost and the "special *29 redemption" price. ¹ In fact, the record shows that except for an unsubstantial portion, the bonds could not have been redeemed at the "special redemption" price at any time while petitioners owned them. The presumption of correctness attaching to the determination of the Commissioner is not a very satisfactory basis on which to rest a decision, but there is nothing factually or legally beneficial to petitioners in this case upon which a decision in their favor can be rendered.

Decision will be entered for the respondent.