Court Opinion

ID: 9639519
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:21:33.886857+00
Date Added: 2024-06-11T18:10:19.514810
License: Public Domain

L. HAND, Circuit Judge
(dissenting).
If a company keeps its books on an accrual basis and issues bonds at less than par, the discount is immediately incurred, whether one regards it as a loss or an expense. If the books are on a cash basis, the discount is not paid until the bonds are paid. Thus, in either case there is no legal warrant for spreading the deduction over the life of the bonds;, the practice which has grown up and is of undoubted validity, is based upon a fiction, following-the accountant’s device for preparing to meet the burden of paying the discount all at once. Unless this fiction is extended to cover a buyer in “reorganization” it will be the means of preventing the deduction of a part of what at some time or other is an undoubted loss or expense. The buyer is not a party to the original loan and cannot claim any deduction because of it; it merely buys the assets and pays for them in cash and by a promise to pay the face of the bonds. It is true that that promise includes the discount, but the cash payment presumably is less by that amount, if the bonds bear interest. Certainly the buyer has not suffered any loss, or paid any expense. Nor will any deduction because of it appear in estimating the buyer’s gain or loss, if it sells the assets in whole or in part. True, the buyer’s “basis” is the seller’s “basis,” but if the seller had sold the assets, its “basis” would not include the discount. It would be the cost of the assets sold; that is, the amount borrowed so far as the proceeds of the bonds had been used to buy them. Therefore, all deduction for the unamortized discount disappears from the computation of the taxes of either buyer or seller, unless the buyer is allowed to complete the amortization deductions. A legal fiction is a good contrivance only if it effects a just result, but there is no excuse for it otherwise; this one must be carried out consistently in order to avoid injustice. There may be difficulties when the books are kept on a cash basis, but when as here they are not, it seems to me that the 'deductions of which the seller is deprived should enure to the buyer rather than be denied in toto.