Commissioner v. Korell

Background

An individual taxpayer bought American Telephone and Telegraph convertible bonds in August 1944 by paying more than face value. Each $100 bond was convertible into one share of stock upon payment of $40, and the stock was trading well above that amount. The bonds were also callable and would have been redeemable at $104 when bought. The taxpayer claimed an amortizable bond premium deduction calculated as the difference between his purchase price and the call price. The Internal Revenue Commissioner disallowed the deduction, but lower tax courts allowed it, producing a split among appellate courts that the Supreme Court agreed to decide.

Reasoning

The question was whether the tax rule for "amortizable bond premium" covered extra payment made because a bond was convertible or only covered premium paid to secure higher interest. The Court looked at the statute’s language, committee reports, and ordinary industry usage and found Congress intended the rule to apply to bonds defined by type, including callable and convertible bonds. The Court held "bond premium" means any extra payment above face value, regardless of the reason for paying it, so the taxpayer could amortize the premium over the period to the earliest call date. The practical result: the taxpayer wins and is entitled to the deduction claimed.

Real world impact

The decision lets owners of callable or convertible corporate bonds treat extra purchase price as amortizable premium for tax deductions. It affects how bond investors compute taxable income and basis adjustments. Congress remains free to change the rule if it chooses; the Court applied the statute as written.

Dissents or concurrances

Justice Black dissented, favoring the Ninth Circuit’s narrower view excluding conversion-related premium; two Justices did not participate.