Bonds – Income Bonds – Rights of Bondholders and Deductibility of Interest for Federal Income Tax Purposes
An income bond is an obligation of a corporation on which interest is payable only out of earnings, as distinguished from the ordinary corporate bond on which interest is a fixed charge regardless of earnings. Long regarded as a hybrid security which is to be issued only as a last resort, income bonds have grown surprisingly in popularity over the past two decades. It is the purpose of this comment to consider the historical background of income bonds, to make a comparative analysis of the bond indentures as they affect investors’ rights, and to consider the deductibility of income bond interest in determining taxable income for federal income tax purposes. A study of the twenty-three companies whose income bonds are currently listed on the New York Stock Exchange is the focal point for this comment, but the particular problems incident to unlisted bonds of small and closely-held corporations will also be considered.