Vanderbilt Law Review

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The first codification of the United States Internal Revenue laws gave a corporation a deduction from income of "[a]ll interest paid or accrued within the taxable year on its indebtedness. ...This same language is presently in force in the Internal Revenue Code of 1954. The statutory language authorizing the interest deduction has never dealt explicitly with the deductibility of discount arising upon a corporation's original issuance of bonds. Treasury Regulations promulgated pursuant to the interest deduction sections, however, have recognized continually that the statutory language embodies a deduction for original issue discount. 'The latest pre-1969 regulation, which limits itself to bonds issued on or before May 27, 1969 states: "If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds. For purposes of this section, the amortizable bond discount equals the excess of the amount payable at maturity . . .over the issue price of the bond (as defined in paragraph (b)(2) of § 1.1232-3)." The definition of issue price is generally that price at which the bonds were first sold by the corporation. The pre-1969 regulations, however, did not explicitly single out for different treatment those situations in which a corporation issues a bond in exchange for noncash property. This absence of specific regulatory authority did not impede the attempted taking of discount deductions by corporations that had issued bonds in exchange for some of their own outstanding equity securities in recapitalizations or by corporations that had utilized bonds directly to acquire tangible property for use in their business. In these instances corporations have claimed that amortizable bond discount was present when the maturity value of the issued bonds exceeded the value of the noncash property received. The same absence of specificity in the statute and regulation has allowed the Commissioner of Internal Revenue to argue that amortizable bond discount could not arise in such instances. The most significant forum for these conflicting arguments has been the federal judiciary,and this Note devotes substantial space to a consideration of the judiciary's handling of this problem. Inasmuch as one of the primary goals of this Note is to evaluate the appropriateness of the 1969 legislative response to the bonds-for-noncash property question, a study of the pre-1969 cases provides the background and a framework necessary for such an evaluation. Furthermore, the pre-1969 case law is still timely because it should govern the question for bonds issued prior to May 27, 1969.