- 27 -
thereof from RMECC; and (2) the discharge of the conversion
obligation under the indenture, an obligation which Metals had
both directly and as guarantor of the conversion obligation of
RMECC. On this basis, the excess of the fair market value of
Metals' shares into which the debentures were converted over such
principal amount would be attributable to the conversion feature
and the balance to the debentures. Such an approach has been
suggested, albeit implicitly, by National Can Corp. v. United
States, supra, and Honeywell Inc. v. Commissioner, 87 T.C. 624
(1986) (in the context of disallowing the parent a deduction for
bond premium under sec. 171);7 see also Clark Equipment Co. v.
United States, 912 F.2d 113 (6th Cir. 1990); Strasen, "The
Taxation of Convertible and Other Equity-Flavored Debt
Instruments," 65 Taxes 937 (1987); Committee on Taxation of
International Finance and Investment of New York State Bar
Association, Tax Section, "Report on International Finance
Subsidiaries," 28 Tax L. Rev. 443 (1973). Under this approach,
Metals' basis in the debentures would be limited to their
7 We recognize that we looked askance at a breakdown of a
convertible debenture into components in Hunt Foods & Industries,
Inc. v. Commissioner, 57 T.C. 633, 641 (1972), affd. per curiam
496 F.2d 532 (9th Cir. 1974). But that case dealt with the
rights of an issuer to deduct original issue discount in respect
of the conversion feature of a debenture which involved the
issuance of its own shares and not the shares of another
corporation as is involved herein. Thus, Hunt Foods is
distinguishable as are other cases relied upon by respondent to
sustain her position herein.
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