Taxation-Federal Income Tax- Taxpayer’s Dividend to Shareholders Allowable As Amortizable Bond Premium Deduction

In an effort to make an amount distributed to its shareholders tax deductible, taxpayer bought utility bonds which were selling at a large premium and which were callable on thirty days’ notice. Taxpayer borrowed an amount equal to the lowest call price, mortgaged the bonds to secure the loan, and paid cash equal to the difference, i.e., the premium in this case. After holding the bonds for thirty days, taxpayer declared a dividend of the bonds and distributed them to its shareholders subject to the indebtedness. The shareholders sold the bonds, paid off the loan from the proceeds, and retained the difference as the cash dividend. Taxpayer claimed the amount of the premium as an amortizable bond premium deduction under section 171 of the Internal Revenue Code of 1954. The Commissioner disallowed the deduction and was sustained by the Tax Court on the ground that the transaction in the bonds was a sham to cover the real purpose of distributing a dividend. On appeal, held, reversed. The taxpayer made actual investments in the ordinary sense of the word and was subjected to the risks of ownership for which the statute was designed to compensate. Unless Congress clearly provides otherwise, tax consequences should not be dependent upon the discovery of a purpose or a state of mind. Fabreeka Prods. Co. v. Commissioner, 294 F.2d 876 (1st Cir. 1961).