Court Opinion

ID: 6904059
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:57:59.396371+00
Date Added: 2024-06-11T16:06:16.556043
License: Public Domain

On Petition for Rehearing.
PER CURIAM.
While we do not consider that we have misunderstood the Commissioner’s position, at least to the extent asserted in his earnest *156and vigorous petition for a rehearing, yet it is desirable, against the event that the case may go higher, that his contentions before us be not misstated. Accordingly we set forth his position in his own words, viz., “that, as a matter of common understanding, and furthermore, as demonstrated by the legislative history, ‘amortizable bond premium’ represents the amount which has ■been originally paid to obtain a higher rate of interest and which is reflected in each interest payment as the difference between the average or true yield of the bond and the actual interest rate.” This view that the quoted words have a single meaning so well understood that the statutory explanation can be considered only a method of computation and not a definition must necessarily control and limit the' word “premium” itself. So the Commissioner says: “Bond premium is not any payment over the call price made' in connection with the purchase of a bond regardless of the nature or purpose of the payment. It is not a payment manifestly made for an option to purcháse stock as that here involved. Even were the legislative history unconvincing it could be demonstrated that as a matter of common understanding a bond premium represents the excess capital paid to obtain a higher rate of interest.”
But this scholarly accountant’s concept, which is not so naturally a legal or a lay mandate, has not appealed to us, as it did not to the several members of the Tax Court, 10 T.C. 1001, as being of universal significance. Nor did the legislative history —which was, in fact, cited in the Tax Court’s decision and referred to by us— show so precise and exclusive a meaning ascribed to a fairly ordinary word. As a matter of fact, this restricted meaning of “premium” is definitely rejected in the law of trusts, and in the apportionment of principal and income to life tenant and remainderman, where the general idea of amortization has had perhaps its most extensive development in the law. Thus where amortization is required, a trustee is expected to restore to principal the excess amount he has expended, not some lesser theoretic amount resting on an unknown variable such as the assumed normal rate of interest on money. 1 Restatement, Trusts, § 239, comment f, 1935; 2 Scott on Trusts, § 239.2, 1939 ; 4 Bogert on Trusts and Trustees, § 831, 1935. Indeed, from the time of Holmes on, the idea that the premium is paid solely for interest above the market rate has been attacked as clearly a fiction. Hemenway v. Hemenway, 134 Mass. 446, 449; New England Trust Co. v. Eaton, 140 Mass. 532, 544, 545, 4 N.E. 69, 77, 78, 34 Am.Rep. 493; 45 Yale L.J. 156; 20 Minn.L.Rev. 203 ; 34 Mich.L.Rev. 448.1 The passages quoted by the Commissioner seem to us no more than apt illustration and not at all a suggestion of exclusion of all else from the concept “premium,” or of limitation of the broad; statutory language. And the demonstration seems complete with the flat statement in the committee reports relied on by both the Tax Court and us — without the qualifying provisions surely natural if the Commissioner’s projected limitations had been in the minds of the legislators — that “in the case of a convertible bond, if the option to convert the bond into stock rests with the owner of the bond, the bond is within the purview of this section.”
The petition for rehearing is denied.

 “That the premium is paid solely in respect of interest, which is the assumption supporting amortization, is a fiction, is demonstrated by any survey of bond prices.” 45 Tale L.J. 156, 158, discussing Old Colony Trust Co. v. Comstock, 290 Mass. 377, 195 N.E. 389, 101 A.L.R. 1. The author of the annotation to this case, 101 A.L.R 7, 9, has tried valiantly here and elsewhere, see 48 A.L.R. 689, 131 A.L.R. 1426, to argue that tbe problem in property law is only a simple mathematical and financial one, but without success with the courts. The uncertainties involved afforded one of the reasons for the rejection of a duty to amortize in the Uniform Principal and Income Act, § 6, 9 U. L. A. 593, 594, 599; cf. 1929 Handbk. Nat. Conf. of Commissioners on Uniform State Laws 290-292.