*795 1. A corporation which in a prior year had issued its own bonds at a discount and which in the taxable year redeemed such bonds for cash, at a premium, with funds which it had secured from a new bond issue, is entitled to deduct the unamortized discount and expenses applicable to the bonds redeemed and also is entitled to deduct the premiums incurred and paid in their redemption.
2. In the taxable year certain subsidiaries of petitioner transferred their assets to petitioner. In prior years these subsidiaries had issued bonds at a discount. In the taxable year these subsidiaries redeemed in cash their own bonds with funds advanced by petitioner out of the proceeds of a new bond issue floated by petitioner. Held, that petitioner in a consolidated return filed with said subsidiaries is entitled to deduct the unamortized discount applicable to the bonds redeemed.
3. In the taxable years petitioner called and redeemed at a premium certain bonds which had been issued prior thereto by certain of its subsidiaries, the face value of which bonds petitioner had assumed and agreed to pay in a transfer of the assets of these subsidiaries to petitioner. Held, petitioner is*796 entitled to deduct the amount of the premiums paid in the redemption of these bonds. Coast Counties Gas & Electric Co.,33 B.T.A. 1199">33 B.T.A. 1199, overruled on this point.
4. In the taxable year petitioner liquidated one of its subsidiaries, taking over its assets in exchange for the transfer and cancellation of all its capital stock and assuming all its liabilities, including bonds which in a prior year the subsidiary had sold at a discount and the payment of which petitioner had guaranteed at the time of issuance. Petitioner called the outstanding bonds for redemption. Held, petitioner is not entitled to take as a deduction the unamortized discount and expense applicable to such bonds.
5. In years prior to the taxable year, petitioner had taken over the assets of certain of its subsidiaries under what is termed "short form of merger" under Pennsylvania law. In prior years these subsidiaries had issued bonds at a discount. Held, that the taking over of the assets of the subsidiaries by the parent corporation was in effect a liquidation of the subsidiaries in consideration of the transfer and cancellation of all their capital stock and the assumption by petitioner*797 of all their liabilities, including the outstanding bonds, and does not come under the rule governing the consolidation of corporations. Held, further, petitioner is not entitled to take as a deduction in the taxable year on its consolidated return the unamortized discount and expenses applicable to these bonds.
6. Prior to the taxable year, three certain corporations chartered under Pennsylvania law merged and consolidated under Pennsylvania statutes to form petitioner and thereupon petitioner succeeded by operation of law to all the rights, privileges, assets, and liabilities of the three merging corporations. Prior to the merger and consolidation one of the corporations had issued bonds at a discount. In the taxable year petitioner called and redeemed some of these bonds. Held, petitioner is entitled to take as a deduction in the taxable year the unamortized discount and expenses applicable to such bonds redeemed.
*1111 This proceeding involves deficiencies in income taxes of $101,395.24 for 1927 and $320,017.64 for 1928.
The*798 petition assigns numerous errors, but all of these have been settled by agreement except certain issues which have been stated *1112 in a stipulation filed at the hearing by the parties. The issues which remain for our decision are stated in the stipulation, as follows:
(A) Whether respondent erred in refusing to allow as a deduction from petitioner's gross income in 1927 the sum of $551,742.90, composed of $243,645.00, representing the amount of premiums accrued and paid by the petitioner in said year upon the retirement of $3,250,000 face value of Metropolitan Power Company First Mortgage Gold Bonds, Series A, due in 1953, and $308,097.90, representing the amount of unamortized discount and expense on said bonds at the time they were retired in 1927?
(B) Whether the respondent erred in refusing to allow as a deduction from petitioner's gross income in 1928 the sum of $2,455,855.85 after deduction of $60,811.86 from $2,516,667.71, composed of $607,978.14, representing the amount of premium paid by the petitioner in said year upon the retirement of $6,080,000 of its First and Refunding Gold Bonds, Series B, due in 1952, $489,167.15 representing the amount of unamortized*799 discount and expense on said bonds at the time they were retired in 1928, and $645,251.34, representing premiums paid and $774,271.08, representing unamortized debt discount and expense, pertaining to the other bonds hereinbefore recited which were retired in 1928. All other issues raised by the pleadings have been settled by agreement of the parties, and the result of such settlement is reflected in the following stipulations as to the amounts of the deficiencies, to-wit:
(a) If both issues (A & B) are decided in favor of the respondent, the amounts of the deficiencies are (1927) $54,549.21, (1928) $283,025.50.
(b) If both issues are decided in favor of the petitioner, the amounts of the overpayments are (1927) $19,936.08, (1928) $11,677.20.
If the Board's decision is otherwise than indicated in paragraphs (a) and (b), supra, the amount of the deficiencies or overpayments should be determined under Board Rule 50.
FINDINGS OF FACT.
The facts have been embodied in a stipulation, together with certain exhibits attached thereto. These are adopted as our findings of fact. The stipulation of facts will be embodied as a part of this report, but the exhibits therein referred*800 to, some of which are quite lengthy, will be omitted because it is not deemed necessary to copy them in this report.
The stipulation of facts is as follows:
1. The petitioner, Metropolitan Edison Company, a corporation duly organized and existing under the laws of the State of Pennsylvania, is and was at all times material to this proceeding, engaged in the business of supplying electric light and power in the Cities of Reading and Lebanon, pennsylvania and extensive surrounding territory. The petitioner, through affiliated subsidiaries, also operates a unified system of electric properties, which serve Easton, York, York Haven, hanover, Gettysburg and adjacent communities in Pennsylvania and Northern Maryland, embracing 184 communities, besides 123 boroughs and towns where power is wholesaled to local distributing companies, serving a population of about 662,000 with 508 miles of high tension transmission lines and 703 miles of distribution lines, a large portion of those in the City of Reading being in underground conduits.
*1113 2. The petitioner, with its affiliated taxpayers, filed consolidated returns for the calendar years 1927 and 1928. A list of the affiliated*801 taxpayers appears on pages 1, 2 and 3 of the notice of deficiency, being Exhibit "A" attached to the petition.
3. Metropolitan Power Company (hereinafter called Power Co.) was organized under the laws of Pennsylvania, on April 24, 1923. All its stock was owned by the petitioner. On or about July 17, 1923 the Power Co. assumed, with the sanction of Pennsylvania Public Service Commission, the legal status of a public service company with all the obligations imposed upon it by such status, and upon its written stipulation that the Certificate of Public Convenience may be limited to the erection, operation and maintenance of a plant and proper associated facilities for the manufacture of electrical energy in and adjoining the Borough of Middletown, Dauphin County, Pennsylvania, and for the distribution and sale at said plant, and not elsewhere, of electrical energy. The purpose of the Power Co. was to build and operate a large electric generating station on the Susquehanna River, embracing a tract of about 62 1/2 acres in the Borough of Middletown, an advantageous location for its power plant. All the electricity generated at the station was sold to the petitioner pursuant to a*802 contract whereby the petitioner agreed to pay therefor a total amount sufficient to enable the Power Co. to earn a gross revenue at least sufficient to meet all costs of operation and other charges, other than for capital purposes, including maintenance, depreciation, taxes and interest on indebtedness.
4. The Power Co. was organized as a separate corporation in order to be able to raise a large part of the necessary construction funds through a first lien mortgage on the plant. The petitioner, in 1923, purchased and guaranteed and sold to the public, all of the bonds issued by the Power Co.; purchased all of the stock and loaned to the Power Co. on open account approximately $3,000,000 and, except for the $3,250,000 of bonds, the petitioner was practically the sole investor and creditor. These bonds were originally issued at 90 to the petitioner, which immediately endorsed them and guaranteed them as to principal and interest and sold them at the same price.
5. On February 15, 1927, the Public Service Commission of the State of Pennsylvania issued its Certificate of Public Convenience granting the application of the Power Co. for approval of the sale of all its property*803 except public franchises to the petitioner. (The petition specifically states that the Power Co. had no public franchises; and for that reason a sale was resorted to rather than a merger). The actual transfer, according to the books, took place on February 28, 1927. All its assets and liabilities were transferred to the books of the petitioner as they stook on the books of the Power Co. The deficit from operations was charged against the surplus of the petitioner. The petitioner surrendered the entire capital stock of the Power Co. to it for cancellation and the company became inactive on or about February 28, 1927, and continued inactive until its dissolution on or about January 8, 1928.
6. The petitioner, on February 28, 1927, assumed the $3,250,000 liability of the Power Co.'s First Mortgage Gold Bonds, Series A 6% due June 1, 1953, which, as stated supra, were guaranteed by it at issuance, of which the entire amount was outstanding in the hands of nonaffiliated parties. The intercorporate debt of the Power Co. to the petitioner was cancelled in the amount of approximately $3,000,000.
7. The bonds assumed were callable on thirty days published notice on any interest*804 date to and including June 1, 1938 at 107 1/2%; and pursuant *1114 to the terms of the indenture the bonds were called for redemption on December 1, 1927 by the petitioner, which purchased or redeemed and then retired during the calendar year 1927 the following First Mortgage Gold Bonds, Series A 6% due 1953 of the Power Co., as follows:
| Date purchased and/or redeemed * | Principal amount | Price | Accrued and |
| paid premium | |||
| October 21, 1927 | $1,000 | $107.125 | $71.25 |
| October 21, 1927 | 5,000 | 107.25 | 362.50 |
| November 11, 1927 | 27,000 | 107.375 | 1,991.25 |
| November 17, 1927 | 1,000 | 107.50 | 75.00 |
| November 21, 1927 | 25,000 | 107.375 | 1,843.75 |
| November 21, 1927 | 17,000 | 107.50 | 1,275.00 |
| November 27, 1927 | 19,000 | 107.375 | 1,401.25 |
| December 1, 1927 * | 3,155,000 | 107.50 | 236,625.00 |
| Total | $3,250,000 | $243,645.00 |
8. At the time of the redemption of said bonds, as aforesaid, there remained of the debt discount and expense incurred on the issuance of said bonds $308,097.90, unamortized by annual deductions. Petitioner now claims the right to deduct from its gross income for 1927 premiums accrued and paid in 1927, amounting to $243,645.00 and said*805 unamortized debt discount and expense, or a total of $551,742.90.
9. There are attached hereto and made a part hereof: Exhibit A, Certificate of the Secretary of the Public Service Commission of the Commonwealth of Pennsylvania dated February 25, 1927; Exhibit B, Certificate of Public Convenience dated February 15, 1927; Exhibit C, Report and Order of the Public Service Commission dated February 15, 1927; Exhibit D, Application of the Power Co. for Certificate of Public Convenience; Exhibit E, letter dated February 4, 1927 from Hedley V. Cooke to the Secretary of the Public Service Commission in reply to Exhibit F, the Public Service Commission's letter of January 31, 1927.
10. On or about June 9, 1927 the petitioner sold 28,000 shares of its common capital stock for $1,540,000, and on November 29, 1927 it borrowed from General Gas & Electric Corporation on a demand note $1,700,000, which funds were employed to retire the aforesaid First Mortgage 6% Bonds issued by the Power Co., guaranteed both as to principal and interest by petitioner at the time of issue and assumed upon the acquisition of the assets of the Power Co. in February, 1927.
11. On February 1, 1928 the petitioner, *806 pursuant to previous notice and call, as required by the Indenture, retired bonds of the principal amount of $6,080,000 (being all of the bonds outstanding) of its First and Refunding Mortgage Gold Bonds, Series B, 6% issued February 1, 1922 and maturing February 1, 1952. Upon said retirement, the petitioner paid in cash a premium of $607,978.14, which thereupon accrued. The premium or call price was $110. A small amount of the bonds were purchased during the calendar year 1928 for retirement before the actual retirement date at slightly less than $110. This explains why the premium accrued and paid is as above stated, rather than $608,700. The amount of unamortized discount and expense on said bonds at the time of their retirement in 1928 was $489,167.15. Petitioner claims these amounts as deductions from income in 1928. The total premiums and unamortized debt discount and expense at the time of the retirement incurred and accrued during the calendar year 1928 upon the aforesaid retirement, amounted to the sum of $1,097,145.29. The object of the company in retiring these bonds was to reduce its interest expense rate from 6% to 4 1/2% and to simplify the *1115 corporate*807 funded debt structure. The retirement was accomplished by funds which were borrowed on a short term note to the Guaranty Trust Company, which loan was repaid from the proceeds of petitioner's issue of $23,000,000 First Mortgage 4 1/2% Gold Bonds, Series D, issued March 1, 1928, due in 1968.
12. During the calendar year 1928 the petitioner pursuant to the terms of the various indentures hereinafter referred to, called and retired the following obligations of former subsidiaries which it theretofore had assumed by merger under the Laws of Pennsylvania, as more particularly said hereinafter. In retiring these assumed obligations, the petitioner incurred and paid premiums as follows:
Description of the obligation assumed by the petitioner upon merger
Cumberland Valley Light & Power Co. 1st Mtg. 6's 1951
York Haven Water & Power Co. 5's due 1957
Hanover Power Co. 1st Mtg. 6's Series A 6/1/28 Series B & C due 1941
Metropolitan Electric Co. 1st Mtg. 5's due 1939
Pennsylvania Edison Co. 1st A 5's B 6's Mtg. 1946 (See note A)
Total Premiums Incurred and Paid on Retirement
| Principal Retired | Premium Incurred and Paid |
| $30,400.00 | $912.00 |
| $1,345,000.00 | $66,905.00 |
| 807,200.00 | 12,489.34 |
| 2,348,000.00 | 234,425.00 |
| 6,612,300.00 | 330.520.00 |
| 645,251.34 |
*808 At the time the aforesaid obligations were redeemed and retired, there existed unamortized debt discount and expense amounting to $769,864.54 and consisted of:
Description of the obligation assumed by the petitioner upon mergerCumberland Valley Light & Power Co. 1st Mtg. 6's 1951
York Haven Water & Power Co. 5's due 1957 Advertising Notice of Redemption
Hanover Power Co. 1st Mtg. 6's Series A due 6/1/28 Series B & C due 1941
Metropolitan Electric Co. 1st Mtg. 5's 1939
Pennsylvania Edison Co. 1st Mtg. A 5's B 6's 1946 (See Note A)
Total Unamortized Debt Discount and Expense incurred at retirement
Unamortized Debt Discount & Expense at Retirement
$ 9,736.46
470.00
50,216.50
17,383.28
692,058.30
$ 769,864.54
Note A. - Pennsylvania Utilities Co. and Pennsylvania Edison Co. merged in 1921 see Exhibit K. Prior to the merger Pennsylvania Utilities Co. had issued $1,815,200.00 of said bonds while Pennsylvania Edison Co. issued $4,797,100.00 of said bonds subsequent to said merger in 1921.
Petitioner claims the right to deduct the aforesaid items of bond discount and expense and premiums from its gross income for 1928.
*809 13. The obligations under the Indentures were prior liens upon assets acquired at the time the aforesaid companies were merged with the petitioner pursuant to the laws of the Commonwealth of Pennsylvania. At the time of the merger of each of the aforesaid companies, the assets and liabilities were acquired and transferred by merger and the liabilities thus assumed, as shown in Exhibits G, H, I, J, and K, being the applications to the Public Service Commission of Pennsylvania for approval of the plans of merger and consolidation. The mergers of all of the aforesaid companies were under the act of the General Assembly of the Commonwealth of Pennsylvania April 17, 1876 P.L. 33 and the amendments thereof and supplements thereto except Metropolitan *1116 Electric Company which was merged pursuant to Act of May 3, 1909 P.L. 408, Sec. 1 and Pennsylvania Edison Company which was merged under Section 23 of the General Corporation Act of April 29, 1874 P.L. 30 as amended by Section 1 of the Act of April 2, 1915 P.L. 724, and all the mergers aforesaid were upon application with the approval and sanction of the Public Service Commission of the Commonwealth of Pennsylvania under Section*810 3(c), Article III and Sections 18 and 19, Article V of the Public Service Company Law with the issuance of a report, order and certificate of public convenience.
14. On April 1, 1928 pursuant to the terms of the Indenture Hamburg Gas and Electric Company retired the following obligations at par:
$58,500 principal amount First Mortgage and Refunding 5% Gold Bonds issued October 1, 1913 due October 1, 1933.
$48,000 principal amount First Mortgage 5% Gold Bonds issued 1910 due April 1, 1930.
The amount of $4,395.04 represented the unamortized debt discount and expense remaining at the time the bonds were retired, of which 91.2% is applicable to the issue of October 1913 and 8.8% is applicable to the issue of 1910. Petitioner claims said amount as a deduction from income in 1928 consolidation.
15. On May 1, 1928 pursuant to the terms of the Indenture, Topton Electric Light and Power Company retired, at par $30,000, principal amount First Mortgage 5% Twenty Year Gold Bonds issued November 1, 1918 due November 1, 1938. At the time of the retirement there existed unamortized discount and expense in the amount of $4.65 which petitioner claims as a deduction in 1928 consolidation.
*811 16. On April 1, 1928 pursuant to the terms of the Indenture, Blue Mountain Electric Company retire, at par, $30,000, First Mortgage 6% Twenty Year Gold Bonds issued April 1, 1921 due April 1, 1941. At the time of the retirement there was incurred and paid, satisfaction fees and expense on said issue in the amount of $6.85 which amount petitioner claims as a deduction in 1928 consolidation.
17. The aforesaid companies (named in paragraphs 14, 15 and 16, supra) became affiliated with the petitioner through the purchase by the latter of their capital stock on April 1, 1928. They were merged with the petitioner on June 30, 1928. The aforesaid retirement of bonds of said companies occurred coincident with the acquisition of their stock by the petitioner on April 1, 1928, except as stated in paragraph 15 and was effected with funds advanced by the petitioner.
18. Except in the cases as hereinbefore stated where it was obtained through sale of common stock by the petitioner and loans made by the petitioner from General Gas & Electric Corporation and Guaranty Trust Company, the money necessary to carry out the foregoing retirements was obtained from the proceeds of the sale*812 on March 1, 1928 of $23,000,000 of Metropolitan Edison Company's First Mortgage 4 1/2% Gold Bonds Series D due March 1, 1968. The premiums, expense and unamortized debt discount and expense are claimed by the several taxpayers as proper deductions in arriving at the consolidated taxable net income.
19. The respondent has allowed a deduction of $60,811.86 from the petitioner's gross income in 1928, which amount represents an aliquot part of the entire amount of premiums, discount and expense incident to the retirement of the Power Company's First Mortgage 6% Bonds (due 1953), petitioner's First and Refunding Bonds (due 1952), and the other bonds hereinbefore recited, in said year, as though the same were a part of the discount and expense applicable to petitioner's issue in 1928 of $23,000,000 First Mortgage *1117 4 1/2% Gold Bonds, Series D, due March 1, 1968. The additional deduction claimed by petitioner for 1928 on account of bond premiums, discount and expense is $2,455,855.85, being the difference between the amount of $2,516,667.71 claimed by the petitioner and $60,811.86 allowed by the respondent.
OPINION.
BLACK: The issues which remain for our decision have*813 been set out in our preliminary statement. We think however that these issues will be better understood if we subdivide them somewhat and this we shall do.
I.Bond premiums and unamortized discount and expense, relating to redemption of petitioner's own bonds. - We shall first take up petitioner's claim for deduction of $1,097,145.29, being the total premiums and unamortized debt discount and expense incurred and accrued at the time of the retirement of $6,080,000 of petitioner's own bonds in 1928. The facts with reference to the retirement of these bonds are stated in paragraph 11 of the stipulation.
The only contention which respondent makes as to why petitioner is not entitled to the deduction claimed is that the bonds were redeemed with the proceeds of petitioner's new bond issue of $23,000,000 first mortgage 4 1/2 percent gold bonds, series D, issued March 1, 1928, due in 1968, and that the amount claimed should be amortized over the life of these new bonds.
It will be noted that none of petitioner's old bonds redeemed in 1928 were exchanged for bonds of the new issue. The bonds retired were redeemed in cash. Under these circumstances petitioner is entitled to*814 the deduction claimed. American Gas & Electric Co.,33 B.T.A. 471">33 B.T.A. 471; East Ninth Euclid Co.,26 B.T.A. 32">26 B.T.A. 32; 27 B.T.A. 1289">27 B.T.A. 1289; National Title Co.,30 B.T.A. 32">30 B.T.A. 32; San Joaquin Light & Power Co. v. McLaughlin, 65 Fed.(2d) 677; Commissioner v. Columbia Steel Corporation, 67 Fed.(2d) 989; Commissioner v. California-Oregon Power Co., 75 Fed.(2d) 644; Commissioner v. Union Public Service Co., 75 Fed.(2d) 723; Commissioner v. Central States Electric Corporation, 76 Fed.(2d) 1011.
The respondent in his brief admits that the foregoing authorities are against him on this point, but elects not to concede the issue.
II.Unamortized discount and expense of redemption relating to subsidiaries' bonds. - We shall net take up petitioner's claim for deduction on a consolidated return for 1928 of unamortized discount and expense relating to certain bond issues of the Hamburg Gas & Electric Co., Topton Electric Light & Power Co., and Blue Mountain Electric Co.
*1118 These corporations were subsidiaries of petitioner and filed*815 consolidated returns with petitioner for the year 1928. The facts with reference to the retirement of these bonds are stated in paragraphs 14, 15, 16, and 17 of the stipulation. These bonds were redeemed by the corporations which issued them with funds advanced by petitioner. Respondent's only contention as to why petitioner is not entitled to take the deduction claimed on the consolidated return is that the funds with which the bonds were redeemed were obtained by petitioner's new issue of $23,000,000 of bonds discussed under "I" above. Respondent admits that the authorities are against him on this point, but he does not concede the issue. On the strength of the authorities cited under "I" above, we hold for petitioner on this issue.
III.Bond premiums incurred and paid in redemption of bonds assumed by petitioner in acquiring assets of subsidiary corporations. - We shall next consider petitioner's contention that it is entitled to deduct bond premiums incurred and paid in the redemption of bonds which were not originally issued by petitioner but which it assumed and agreed to pay at the time it acquired all the assets of certain of its subsidiaries. The circumstances*816 attending the assumption of and agreement to pay these several bond issues and the names of the subsidiaries are set forth in the stipulation and need not be repeated here. We deem it unimportant to decide for this point whether petitioner became liable to pay these bonds as a part of the consideration for the purchase of assets in liquidation of a subsidiary or whether the transaction in which the bonds were assumed was a nontaxable reorganization between petitioner and its subsidiary short of a statutory merger and consolidation, or whether the transaction by which petitioner became liable on the bonds was a statutory merger and consolidation of two or more corporations under which petitioner as the succeeding consolidated corporation became liable on the bonds not by reason of a contract of purchase, but by operation of law. We think in any event, regardless of the form of the transaction, petitioner is entitled to the deduction of the premiums which it paid in the redemption of these bonds. When petitioner became liable to pay the bonds, whether by contract of purchase and assumption, or by contract of merger short of a statutory consolidation, or by operation of law following*817 a statutory merger and consolidation of corporations under the laws of the State of Pennsylvania, it became definitely and legally liable for only the face value of the bonds plus the rate of interest provided in the bonds. The bonds, it is true, contained provisions by which the obligor could declare the premature maturity of the bonds *1119 upon condition that certain premiums would be paid upon redemption.
This redemption would usually occur only where prevailing interest rates would justify the calling of the bonds and incurring a premium, so that the debt represented by the bonds could be refunded at a lower interest rate. We do not think that the expenses incurred in redeeming bonds at a premium under such circumstances represent any part of the cost of the assets taken over when liability to pay the face value of the bonds was incurred. Therefore to say, as respondent contends, that a taxpayer under such circumstances is not entitled to a deduction for the amount of bond premiums incurred in the redemption of bonds, unless he affirmatively shows that he has incurred a loss in the purchase of the assets equal to the amount of the bond premiums paid, is not correct*818 reasoning, we think.
Such, it is true, was the basis of our reasoning in Coast Counties Gas & Electric Co.,33 B.T.A. 1199">33 B.T.A. 1199, but we now think that was error. In that case certain subsidiaries of the Coast Counties Gas & Electric Co., under agreements executed and carried out several years prior to the taxable year in question, transferred their properties to the parent corporation, which, as part of the consideration for such transfers, agreed to pay the bonds of the subsidiaries. In 1930 the bonds were called and retired. The taxpayer, the parent corporation, paid a premium on some of the bonds. We held that the taxpayer might not deduct the amount of said premium, as there was no showing that it sustained a loss on the transaction.
We cited in support of our holding in that respect, Helvering v., American Chicle Co.,291 U.S. 426">291 U.S. 426, and United States v. Kirby Lumber Co.,284 U.S. 1">284 U.S. 1. We distinguished Bowers v. Kerbaugh Empire Co.,271 U.S. 170">271 U.S. 170. On reconsideration we think these cases are not in point. In Helvering v. American Chicle Co., supra, the taxpayer in a purchase of assets had*819 assumed and agreed to pay as a part of the purchase price of the assets taken over, the full face value of the seller's outstanding bonds. Subsequently it purchased some of these bonds at less than their issuing price. The Commissioner determined that the difference between the issuing price of the bonds and the price at which they were purchased represented income to the American Chicle Co. The Supreme Court upheld this contention of the Commissioner, citing United States v. Kirby Lumber Co., supra.The Supreme Court, as a part of its reasoning, said: Nothing indicates whether respondent lost or gained by the transaction. * * * Here, for aught we know, there was substantial profit - certainly the record does not show the contrary. Doubtless respondent's books indicated a decrease of liabilities with corresponding increase of net assets."
*1120 As we have already pointed out, we do not think that bond premiums paid in the redemption of bonds represent a part of the cost of assets taken over. Rather we think they represent part of the expenses of taxpayer's business and are deductible as ordinary and necessary business expenses under the provisions*820 of section 23(a) of the Revenue Act of 1928, and section 214(a) of the Revenue Act of 1926, which are applicable to the taxable years involved in this proceeding.
But if we are wrong in characterizing such bond premiums as ordinary and necessary business expenses, such premiums would be deductible under the loss provisions of the applicable statutes. The Court of Claims in the recent case of American Gas & Electric Co. v. United States,17 Fed.Supp. 151, held, under facts practically the same as those present here, that the corporation, which had assumed and agreed to pay the bonds when it took over the assets of the selling corporation and subsequently called the bonds for redemption at a premium, was entitled to take as a loss deduction the amount of the premiums paid in the year of redemption. It will be thus noted that in the American Gas & Electric Co. case the Court of Claims placed the allowable deduction under the loss provisions of the statute. So it seems plain that whether the amount of bond premiums paid under such circumstances is characterized as business expense or as a loss, it is an allowable deduction in determining taxpayer's net income.
*821 We now think that our holding in the Coast Counties Gas & Electric Co. case, supra, to the contrary was erroneous and on that point it will no longer be followed.
IV.unamortized discount and expense relating to bonds of the Metropolitan Power Co. - We shall next consider petitioner's claim of the right to deduct unamortized discount and expenses on its consolidated return for 1927 by reason of its redemption in that year of certain bonds previously issued by the Metropolitan Power Co. The amount of the deduction claimed in this respect is $308,097.90. Facts with reference to these bonds are shown in paragraphs 3, 4, 5, 6, 7, 8, 9, and 10 of the stipulation.
Petitioner does not contend that the transaction by which petitioner took over the assets of the Metropolitan Power Co. and assumed all of its outstanding liabilities, including the bonds in question, was a strict merger under the laws of the State of Pennsylvania. Petitioner in its brief terms the transaction as a de facto merger. Regardless of petitioner's characterization, we think the facts which have been stipulated show a liquidation of the Metropolitan Power Co. by its parent, the Metropolitan*822 Edison Co. Such *1121 a liquidation is one in which gain or loss is recognized to the parent corporation. Pierce Oil Corporation,32 B.T.A. 403">32 B.T.A. 403; Commissioner v. Aluminum Goods Manufacturing Co.,287 U.S. 544">287 U.S. 544; Commissioner v. Riggs National Bank, 57 Fed.(2d) 980. In such a transaction the purchasing corporation is not entitled to deduct the unamortized discount and expenses remaining unrecovered on the bonds previously issued by the subsidiary. Turner-Farber Love Co. v. Commissioner, 68 Fed.(2d) 416; American Gas & Electric Co.,33 B.T.A. 471">33 B.T.A. 471; affirmed, except as to bonds of Appalachian Power Co., which the court held to have been assumed in a statutory merger or consolidation; American Gas & Electric Co. v. Commissioner, 85 Fed.(2d) 527.
Following these authorities we hold that petitioner is not entitled to the deduction of $308,097.90 unamortized discount and expenses which it claims by reason of the redemption in 1927 of bonds of the Metropolitan Power Co.
V.Unamortized discount and expense relating to bonds assumed by petitioner upon transfer of*823 assets by wholly owned subsidiaries in a so-called "short form" of merger. - We shall next take up petitioner's claim for deduction on a consolidated return for 1928 of $752,481.26 unamortized debt discount and expense of retirement of bonds previously issued by the Cumberland Valley Light & Power Co., York Haven Water & Power Co., Hanover Power Co., and Pennsylvania Edison Co. Facts with reference to these bonds will be found in paragraphs 12 and 13 of the stipulation.
It has been stipulated that during the calendar year 1928 the petitioner, pursuant to the terms of the various indentures referred to, called and retired certain bonds of former subsidiaries which it theretofore had assumed by merger under the laws of the State of Pennsylvania. It has also been stipulated that the four so-called mergers above referred to were under the acts of the General Assembly of the Commonwealth of Pennsylvania of April 29, 1874, and April 17, 1876.
The two acts of April 29, 1874, and April 17, 1876, pursuant to which the contracts were executed, and amendments thereto are embodied in 15 Purdon's Pennsylvania Statutes, Annotated, section 595, and the following provisions are pertinent to*824 this controversy:
Any corporation created under the provisions of this act, * * * may reduce its capital stock * * * by a vote of the stockholders * * *; and it shall be lawful for any corporation in the same manner to sell, assign, dispose of and convey to any corporation created under or accepting the provisions of this act, its franchises, and all its property, real, personal and mixed, and thereafter such corporation shall cease to exist, and the said property and franchises not inconsistent with this act, shall thereafter be vested in the corporation so purchasing as aforesaid * * *.
*1122 We think that the so-called mergers under the above quoted acts, which petitioner in its brief calls "short form of merger", amounted in effect to a sale by the subsidiary of its assets to the parent corporation. In fact in each of the exhibits attached to the stipulation, showing details of the merger of Cumberland Valley Light & Power Co., York Haven Water & Power Co., Hanover Power Co., and Pennsylvania Edison Co. with the Metropolitan Edison Co., petitioner, the transaction is referred to as a sale of assets by the subsidiary to the parent corporation. For example, in the application*825 for approval by the Public Service Commission of the Commonwealth of Pennsylvania of the transfer of assets by the York Haven Water & Power Co. to the Metropolitan Edison Co., the proceeding is captioned as follows: "In the Matter of the application of York Haven Water and Power Company and Metropolitan Edison Company under Section 3(c) Article III and Sections 18 and 19, Article V of the Public Service Company Law, for the approval of the sale of the property and franchises of the former to the latter Company." A careful inspection of each of the exhibits which show the details of the transfer of assets by the four above named corporations to the Metropolitan Edison Co. convinces us that the transactions were essentially liquidations of those companies in consideration of the surrender and cancellation of all their capital stock which was held by petitioner and the assumption of all their liabilities by the petitioner.
In such a situation the same rule applies as we applied in "IV" above, relating to the bonds of Metropolitan Power Co. On the strength of the authorities there cited, we hold against petitioner on the issue of deduction of unamortized discount and expense on the*826 redemption of the bonds of the Cumberland Valley Light & Power Co., York Haven Water & Power Co., Hanover Power Co., and Pennsylvania Edison Co.
VI.Unamortized discount and expense bonds assumed by petitioner in consolidation of three corporations to form petitioner. - On August 6, 1917, the following corporations were consolidated to form the Metropolitan Edison Co. (petitioner): Metropolitan Electric Co., Edison Electric Illuminating Co. of Lebanon, Pennsylvania, and Lebanon Valley Electric Light Co. This consolidation took place under the Act of May 3, 1909, P.L. 408, section 1, Laws of the State of Pennsylvania. See paragraph 13 of the stipulation.
Section 5750 of the Pennsylvania Statutes, which amends the act of May 3, 1909, reads as follows:
SEC. 5750. Effect of merger; new patent bonus; certificate of reports and payment of taxes. - Upon the filing of said certificates and agreement, or copy *1123 of the agreement, in the office of the Secretary of the Commonwealth, and upon the issuing of new letters patent thereon by the Governor, the said merger shall be deemed to have taken place, and the said corporations to be one corporation under the name adopted*827 in and by said agreement, possessing all the rights, privileges, and franchises theretofore vested in each of them; and all the estate and property, real and personal, and rights of action, of each of said corporations, shall be deemed and taken to be transferred to and vested in the said new corporation, without any further act or deed: Provided, That all rights of creditors and all liens upon the property of each of said corporations shall continue unimpaired, limited in lien to the property affected by such liens at the time of the creation of the same, and the respective constituent corporations may be deemed to be in existence to preserve the same; and all debts not of record, duties and liabilities of each of said constituent corporations shall thenceforth attach to the said new corporation, and may be enforced against it to the same extent and by the same process as if said debts, duties, and liabilities had been contracted by it. But such merger and consolidation shall not be complete, and no such consolidated corporation shall do any business of any kind, until it shall have first obtained from the Governor of the Commonwealth new letters patent, and shall have paid to the*828 State Treasurer a bonus, as prescribed by law, upon all its capital stock in excess of the amount of capital stock of the several corporations so consolidating, upon which the bonus required by law has been theretofore paid: And provided further, That new letters patent of such consolidated corporation shall not be issued by the Governor of the Commonwealth, until each corporation entering into and forming the consolidated corporation shall have filed with the Secretary of the Commonwealth a certificate from the Auditor General of the Commonwealth, setting forth that all reports required by the Auditor General of the Commonwealth have been duly filed to the date of the proposed merger, and that all taxes due the Commonwealth of Pennsylvania have been paid, up to and including said date. (1915, April 20; P.L. 205, sec. 1.)
The agreement of merger is set out in full in Exhibit J of the stipulation and bears the caption, "Agreement of Consolidation and merger by and between Metropolitan Electric Company, The Edison Electric Illuminating Company of Lebanon, Pa., and Lebanon ValleyElectric Light Company Forming Metropolitan Edison Company." The agreement to merge and consolidate is*829 a lengthy document and it is believed unnecessary to set it out in full here. Suffice it to say it appears to follow and comply with the Pennsylvania Act of May 3, 1909, as amended, relating to mergers and consolidation of Pennsylvania corporations.
We are of the opinion that the merger and consolidation of the three named corporations to form the petitioner - Metropolitan Edison Co. - was substantially the same as the mergers involved in Connecticut Electric Service Co.,35 B.T.A. 444">35 B.T.A. 444. In that case we upheld the contention of the taxpayer that the corporation, which assumed and agreed to pay the bonds of its merged subsidiary as a part of the plan of the merger, was entitled to succeed to the right *1124 to deduct unamortized discount of the bond issue of the subsidiaries. In ruling upon this point, we said:
Three courts and this Board have now spoken on the right of a corporation resulting from a statutory merger to deduct bond discount on bonds issued by a constituent corporation, and they have all reached the same result in allowing such deduction. The Circuit Court of Appeals for the Fourth Circuit, in *830 Western Maryland Ry. Co. v. Commissioner, 33 Fed.(2d) 695; the Circuit Court of Appeals for the Second Circuit, in New York Central R.R. Co. v. Commissioner, 79 Fed.(2d) 247, and American Gas & Electric Co. v. Commissioner, 85 Fed.(2d) 527; the Court of Claims, in American Gas & Electric Co. v. Commissioner, Fed.Supp. (Dec. 7, 1936); and this Board in Illinois Power & Light Corporation v. Commissioner,33 B.T.A. 1189">33 B.T.A. 1189, all allowed the deduction where the consolidation or merger was effected pursuant to the provisions of state statutes. Turner-Farber-Love Co. v. Commissioner, 68 Fed.(2d) 416, did not involve a statutory merger.
On the strength of Connecticut Electric Service Co., supra, and cases there cited, we hold that petitioner is entitled to deduct $17,383.28 unamortized debt discount and expenses upon retirement in 1928 of bonds of the Metropolitan Electric Co. We do not regard this holding as being in conflict with *831 Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Commissioner, 75 Fed.(2d) 719. That case involved the right of a consolidated corporation resulting from the merger and consolidation of two other Pennsylvania corporations to bring forward the statutory net loss of one of the merging corporations incurred in the period prior to the merger and use it as a deduction from the income of the corporation resulting from the consolidation. The court denied the right claimed, citing as authority New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435.
We have here no question of the right to carry forward and use as a deduction a statutory net loss. If the same rule that governs the carrying forward of statutory net losses applies to unamortized discount on bonds, then our decision in Connecticut Electric Service Co., supra, was wrong and so would be all the cases cited in that report in support of the conclusion there reached. We do not think the rule applicable to the carrying forward of statutory net losses is applicable here.
Reviewed by the Board.
Decision will be entered under Rule 50.
STERNHAGEN, dissenting: It seems to me that the decision in subdivision VI, allowing the deduction of $17,383.28 unamortized discount and expense upon the retirement in 1928 of the bonds of the Metropolitan Electric Co., is contrary to Turner-Farber Love Co. v. Commissioner, 68 Fed.(2d) 416; American Gas & Electric Co. v. Commissioner, 85 Fed.(2d) 527. The petitioner is, under Pennsylvania*1125 law, "an entity entirely distinct from that of its constituents", and as the result of merger or consolidation, the constituent corporations "are deemed dissolved" and "cease to exist." Pennsylvania Co. for Insurances, etc., v. Commissioner, 75 Fed.(2d) 719. In this important respect the situation is different from a consolidation in Connecticut, and Connecticut Electric Service Co.,35 B.T.A. 444">35 B.T.A. 444, is not controlling. There the Board said that "the law of Connecticut is particularly clear in providing that the constituent corporations in the case of a merger or consolidation continue their existence in the corporations into which they are merged or consolidated."
MURDOCK agrees with*833 this dissent.
SMITH, dissenting: I am of the opinion that the petitioner is entitled to deduct from the gross income of the taxable years the amounts which have been disallowed in the prevailing opinion of the Board as deductions for unamortized bond discount and expense. The petitioner took over its subsidiaries under mergers of the petitioner with its subsidiaries. It took over the assets of its subsidiaries at the actual costs to the subsidiaries. If the petitioner is not entitled to deduct the unamortized bond discount and expense upon the bonds redeemed in the taxable years it will never get deductions for the unamortized bond discount and expense upon the bond issues of the subsidiaries. In my opinion such a result is not responsive to the legislative intent. See Western Maryland Ry. Co. v. Commissioner, 33 Fed.(2d) 695; New York Central R. Co. v. Commissioner, 79 Fed.(2d) 247.
MORRIS, dissenting: I dissent from that part of the opinion which is inconsistent with the Coast Counties Gas & Electric Co.,33 B.T.A. 1199">33 B.T.A. 1199, for the reasons given in that opinion in support of the conclusion therein. *834