Commissioner v. National Alfalfa Dehydrating & Milling Co.

Summary

The Supreme Court held that a corporation did not incur amortizable bond discount when it issued debentures in exchange for its own outstanding preferred stock. Because the transaction merely replaced one form of previously contributed capital with another and did not involve new capital or an additional borrowing cost, the corporation could not deduct the difference between the debentures' face amount and the preferred stock's market value. The Court reversed the Tenth Circuit.

Holdings

1. A corporation does not incur amortizable bond discount when it issues its own debt obligations in exchange for its previously outstanding preferred stock, without more.
2. The tax consequences of the actual exchange cannot be determined by reconstructing a hypothetical transaction that the taxpayer could have undertaken but did not.

Questions Presented

1. Whether a corporate taxpayer incurs amortizable bond discount under Internal Revenue Code § 163(a) when it issues debt obligations in exchange for its own outstanding preferred stock.
2. Whether the preferred stock's market value may be used to determine a deductible debt discount in an intracorporate exchange that does not involve new capital or a market borrowing transaction.

Disposition

reversed