- 51 -
using net interest expense for those years.
Stock Warrant Issue
The final issue that we consider is the character of the net
proceeds from the sale of the second warrant15 for the purchase
of stock in Sun.
Petitioners, contending that the second warrant was a
capital asset, argue that the entire amount of the proceeds from
the sale of the second warrant constitutes long-term capital
gain.
Respondent, contending that the second warrant constituted a
discount from the price of workstations purchased from Sun and
relying on section 1.471-3(b), Income Tax Regs., argues that the
entire amount of the net proceeds from the sale of the second
warrant constitutes either an increase in CV’s gross income or a
reduction in its cost of goods sold.
The transaction in issue is the same one that we considered
in Sun Microsystems, Inc. v. Commissioner, T.C. Memo. 1993-467,
where we decided the tax treatment of the first and second
warrants with respect to their grantor, Sun, except that in the
instant case we must decide the tax treatment of the second
warrant with respect to its recipient.
We conclude that the approach we took in resolving the issue
15
We note that only the tax treatment of the second warrant,
which CV sold on Mar. 12, 1987, is in issue in the instant case.
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