
    470 F. 2d 531
    FIRST NATIONAL BANK IN DALLAS, TRUSTEE OF THE SUN INVESTMENT COMPANY LIQUIDATING TRUST v. THE UNITED STATES
    [No. 346-69.
    Decided December 12, 1972]
    
      
      Robert S. Price, for plaintiff. Robert L. Bast, attorney of record.
    
      Robert N. Dorosim, and Joseph Kovner, with, whom was Assistant Attorney General Scott P. Orampton, for defendant.
    Before Cowen, Chief Judge, Davis, Skelton, Nichols, Kashiwa, Kunzig, and Bennett, Judges.
    
   Per Curiam

: This case was referred to Trial Commissioner Mastín G. White with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Buie 134(h). The commissioner has done so in an opinion and report filed on November 2,1971. Exceptions were filed by plaintiff to the commissioner’s opinion, findings of fact and recommended conclusion of law, defendant took no exceptions thereto and the case has been submitted to the court on the briefs of the parties and oral argument of counsel. Since the court agrees with the trial commissioner’s opinion, findings of fact and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiff is entitled to recover to the extent indicated in the commissioner’s opinion, together with interest thereon as provided by law, and judgment is entered for plaintiff accordingly with the amount of recovery to be determined pursuant to Bule 131 (c).

OPINION OP COMMISSIONER

White, Commissioner:

The plaintiff sues in this case for a refund of the additional interest equalization tax (and interest thereon) which the Sun Investment Company (“Sim”) paid for the final quarter of 1965 pursuant to a tax deficiency that was assessed against Sun by the Internal Bevenue Service.

The defendant concedes that the plaintiff is entitled to recover, although not to the full extent sought by the plaintiff.

The present suit arose out of a transaction that occurred on December 29,1965, between Sun and L. J. Hooker Investment Corporation, Ltd. (“Hooker”). At the time, Sun was a Delaware corporation that maintained its principal office in Dallas, Texas, and Hooker was a New South Wales, Australia, corporation that maintained its principal office in Sydney, Australia. Hooker was engaged (through many subsidiaries) in real estate development and operation, and also in large-scale farming that involved about 10,000 square miles of land.

On December 29, 1965, Hooker obtained $4,002,242.50 in cash from Sun, and Hooker furnished to Sun — either directly or through Sun’s nominee, Murchison Brothers — 21 promissory notes with a stated interest rate of 6y2 percent each and a total face amount of $4,002,242.50.

Ten of the Hooker promissory notes were issued as Series A notes in the face amount of $350,000 each, or an aggregate of $3,500,000, and 10 were issued as Series B notes in the face amount of $50,000 each, or an aggregate of $500,000. These 20 promissory notes, having a total face amount of $4,000,000, were due at serial maturities during the period from September 1967 through June 1977, although the entire principal of any of the 20 notes could be prepaid by Hooker at any time upon the payment of a premium.

As security for the 10 Series A promissory notes, having a total face amount of $3,500,000, Hooker issued 10 debenture stock certificates, which constituted a pledge of the stock of companies controlled by Hooker and provided additional protection for the holder of the Series A notes upon default. The Series B notes were unsecured.

In addition to the 10 Series A notes and the 10 Series B notes previously mentioned, Hooker also issued to Sun (through Sun’s nominee, Murchison Brothers) an instrument which was in the form of a promissory note for 1,000 Australian pounds (or $2,242.50 in United States money), bearing stated interest at the rate of 6y2 percent and repayable in 11 years. This instrument, in a provision that is very significant from the standpoint of the present litigation, granted to the holder an option to purchase, “by Way of redemption of this Note” and at any time during the 11-year term of the note, 2,000,000 shares of Hooker ordinary stock units at a price of 5 shillings (or $0.560625 in United States money) per share. Thus, the total purchase price for the 2,000,000 shares would be 500,000 pounds, or $1,121,250. However, the holder of the note could either exercise the option wholly, utilizing the entire face amount of the note as a payment of 1,000 pounds (or $2,242.50) on the total purchase price of 500,000 pounds (or $1,121,250) for the stock, or could exercise the option partially for not less than 1,000 stock units (or multiples thereof) and the note would be reduced proportionately. In the event of an exercise of the option, the balance of the purchase price for the stock, over and above the portion paid for through the use of the note for this purpose, was to be paid within 1 month after the issuance of the stock.

The option which Sun acquired in the transaction previously mentioned was never exercised by Sun, either wholly or partially.

In its interest equalization tax return for the last quarter of 1965, Sun reported its acquisition of the 21 Hooker promissory notes at their face amounts, aggregating $4,002,-242.50, and as debt obligations. Sun paid a total interest equalization tax of $197,786.13 on the acquisition of the 21 notes.

The Internal Revenue Code of 1954, as amended, imposes the interest equalization tax “on each acquisition by a United States person * * * of stock of a foreign issuer, or of 'a debt obligation of a foreign obligor * * *” (26 U.S.C. § 4911(a)). The tax on the acquisition of a debt obligation (which is defined in 26 U.S.C. § 4920(a) (1) as meaning “any indebtedness * * *”) is based upon the actual value of such obligation and a rate which varies in relation to the period of time remaining to maturity (26 U.S.C. § 4911 (b) (1) (B)). In the present case, the rates used by Sun in computing the amount of the tax on the acquisition of the 21 promissory notes as debt obligations ranged from a low of 1.5 percent to a high of 8.3 percent.

Upon auditing 'Sun’s account, the Internal Bevenue Service determined a tax deficiency in the amount of $29,174 against Sun, on the ground that Sun, in addition to paying the interest equalization tax on the 21 Hooker promissory notes as debt obligations, should also have paid the interest equalization tax on the stock option, which was valued by the Internal Bevenue Service at $290,000 for such purpose. In this connection, the interest equalization tax on the acquisition of stock issued by a foreign corporation is imposed at the flat rate of 15 percent on the actual value of the stock (26 U.S.C. § 4911 (b) (1) (A)); and the term “stock” is defined as including, inter alia, “any * * * option or similar right to acquire, any stock * * *” (26 U.S.C. § 4920(a) (2) (E)). Sun paid the tax deficiency of $29,174, plus interest in the amount of $2,609.27, on August 7,1967, thus providing the basis for the present suit for a refund.

Sun was liquidated on September 15,1967. This action for a refund was instituted, and is being maintained, by the First National Bank in Dallas as the trustee of the Sun liquidating trust.

The plaintiff, in contending that the convertible note of December 29, 1965, was subject to the interest equalization tax only as a debt obligation, relies principally upon the circumstance that one of the definitions of “stock” contained in 26 U.S.C. § 4920(a) (2) is “(D) any indebtedness which is convertible by its terms into Stock of the obligor, if it is so convertible only within a period of 5 years or less from the date on which interest begins to accrue thereon * * *.” Consistently with this particular definition of “stock,” 26 U.S.C. § 4920(a) (1) (B) declares that the term “debt obligation” shall not include “any obligation which — (i) is convertible by its terms into stock of the obligor, if it is so convertible only within a period of 5 years or less from the date on which interest 'begins to accrue thereon * * The plaintiff concludes from these statutory provisions that any debt obligation which may be converted into stock of the obligor during a period in excess of 5 years — such as the 1,000-pound note of December 29,1965, which could be converted into Hooker stock within a period of 11 years — must be excluded from the “stock” category and included within the “debt obligation” category.

The plaintiff’s line of reasoning would be persuasive if the instrument with which we are concerned had merely provided for the conversion of the indebtedness which it evidenced into Hooker stock units. However, it is significant that the 1,000-pound indebtedness evidenced by the instrument of December 29,1965, was convertible into a maximum of 4,000 shares of Hooker stock units, whereas the instrument in question granted an option for the acquisition of a total of 2,000,000 such shares for an aggregate purchase price of 500,000 pounds, or 500 times the number of shares that could be obtained through the conversion of the 1,000-pound indebtedness. Thus, it would not be realistic to adopt the plaintiff’s view and treat the option provision in the 1,000-pound note as if it related merely to the conversion of the indebtedness evidenced by the note within a permissible period greater than the 5 years referred to in 26 U.S.C. §4920 (a) (2) (D) and (a) (1) (B) (i). We are dealing here with a provision which was, in reality, an option to acquire 2,000,-000 shares of Hooker stock units for a total purchase price of 500,000 pounds and, therefore, fell within the definition of “stock” contained in 26 U.S.C. § 4920(a) (2) (E) — “any interest in, or option or similar right to acquire, any stock * * The acquisition of the option was subject to the interest equalization tax at the rate of 15 percent, applied to the actual value of the option right.

Since the face amount of the promissory note which contained the option provision (i.e., 1,000 Australian pounds, or $2,242.50) was only l/500th of the total purchase price of the 2,000,000 shares of stock which could be purchased under the option provision (i.e., 500,000 pounds, or $1,121,250), it would be unreasonable to presume that the right to buy the 2,000,000 shares of Hooker stock was granted to Sun in return for its purchase of the 1,000-pound note. It is much more reasonable to infer that the option was granted to Sun on the basis of Sun’s purchase of the entire group of 21 promissory notes having a total face amount of $4,002,242.50. The option right in the 1,000-pound note appears, in substance, to have been a detachable warrant with respect to Sun’s package investment in Hooker. The circumstance that the option provision was placed in an instrument which also included a debt obligation of 1,000 Australian pounds does not change the essential nature of the transaction. In this connection, it seems fair to conclude that Sun, by this arrangement, was attempting to control the tax consequences of the acquisition of an option right worth many times the value of the 1,000-pound debt obligation with which the option right was included. ‘

With respect to the value of the option right, the evidence in the record shows that, as debt obligations, the 21 promissory notes which Sun acquired from Hooker had an actual value substantially less than their face amounts. On December 29,1965 — which was the same day on which Sun acquired the 21 promissory notes — Sun sold the 10 Series A notes, together with their collateral security in the form of 10 debenture stock certificates, to Keystone Custodian Funds, Inc. (“Keystone”), a Delaware corporation which maintained its principal office in Boston, Massachusetts. The Series A notes had a total face amount of $3,500,000, and they were sold, together with their collateral security, to Keystone for $3,246,270, or 92.75 percent of their face amount. Keystone was an independent third party, and the purchase by Keystone of the Series A notes from Sun was an arm’s-length transaction that established the actual value of the Series A notes. Sun recorded this transaction on its books by capitalizing the difference of $253,750 between the total face amount of the Series A notes and the amount for which they were sold as the cost of an option to acquire 1,750,000 shares of the ordinary stock units of Hooker. To Sun, therefore, the acquisition of the option to purchase 2,000,000 shares of Hooker stock had a proportionate relationship to the acquisition of ■the Series A notes, and the value of the stock option was separable from the value of the debt obligations.

If the Series A notes, with their collateral security, had an actual value which was only 92.75 percent of their face amount, it is reasonable to infer that the actual value of the 10 Series B notes, which were unsecured, was not more than 92.75 percent of their face amount of $500,000, or $463,750. It is also reasonable to infer that the actual value of the 1,000-pound note, solely as a debt obligation, was not more than 92.75 percent of its face amount of $2,242.50, or $2,079.92.

Accordingly, it appears that, as debt obligations, the 21 promissory notes which Sun acquired from Hooker had an actual value which was only 92.75 percent of their total face amount of $4,002,242.50, or $3,712,079.92, and that the remainder of the $290,162.58 in cash which Sun furnished to Hooker represented the value of the stock option right which Sun acquired as part of the investment package.

That the option right which was included in the 1,000-pound note had a value that was separable from — ‘and vastly greater than — the face amount ($2,242.50) of the debt obligation contained in the same instrument is also shown by the circumstance that on 'September 15, 1967 (the date of Sun’s liquidation), Sun assigned to Murchison Brothers the 1,000-pound note, including the option right, for a total purchase price of $292,242.50.

As indicated previously, a finding is warranted that the option right in the 1,000-pound note had an actual value of $290,162.58. The defendant concedes that, even with this slight increase over the valuation figure of $290,000 used by the Internal Revenue Service, there was an overassessment of tax deficiency against Sun, and that the correct amount of the deficiency should have been $26,337.47 instead of $29,174. The plaintiff is entitled to recover in the present action on the basis of the overassessment, amounting to $2,836.53, together with statutory interest.

FindiNgs oi? Fact

1. At the time material to this case, L. J. Hooker Investment Corporation, Ltd. (“Hooker”), a New South Wales, Australia, corporation with its principal office in Sydney, Australia, was engaged (through many subsidiaries) in real estate development and operation, and in large-scale f aiming that involved about 10*000 square miles of land. Hooker was in need of funds, principally for retiring high-interest (10 percent or more) indebtedness.

2. On December 29, 1965, Hooker obtained $4,002,242.50 in casli from Sun Investment Company (“Sun”), a Delaware corporation with its principal office in Dallas, Texas; and Hooker furnished to Sun — either directly or through its nominee, Murchison Brothers — 21 promissory notes with a stated interest rate of 6% percent and a total face amount of $4,002,242.50.

3. Ten of the Hooker promissory notes were issued as Series A notes in the face amount of $350,000 each, or an aggregate of $3,500,000, and 10 were issued as Series B notes in the face amount of $50,000 each, or an aggregate of $500,000. These 20 promissory notes, having a total face amount of $4^000,000, bore stated interest at the rate of 6% percent payable Semi-annually, and were due at serial maturities during the period from September 1967 through June 1977. The entire principal of each promissory note could be prepaid by Hooker at any time upon the payment of a premium.

4. (a) The Hooker promissory notes were the subject of an agreement dated December 29, 1965, under which Hooker was required to represent that following the closing of the entire transaction with Sim and its nominee, Murchison Brothers, the outstanding warrants or options for the purchase of its ordinary stock units or shares did not exceed a total of 8,188,610.

(b) The agreement also provided, inter alia, that Hooker would: (1) furnish to Sun, within 120 days after the close of each semi-annual period, a consolidated balance sheet and a profit and loss statement; (2) continue to employ J. K. Campbell as Chief General Manager of its business and operations; (3) use its best efforts to cause any one individual nominated by Sun to be a member of its Board of Directors; and (4) not make any substantial change in its present executive management without first informing Sun.

(c) Under paragraph 11(e) of the agreement, Sun was allowed to assign any one or more of the promissory notes, and the rights of the assignees were set forth in such paragraph. In particular, Keystone Custodian Fund, Inc., or Murchison Brothers, as assignees, could obtain all of the rights of Sim under the agreement, with the exception of the right referred to in subdivision (3) of paragraph (b) of this finding.

(d) Additionally, the note agreement provided that not less than 80 percent of the loan proceeds would be used by Hooker to retire indebtedness which either had interest charges of 10 percent or more or which was incurred after June 30,1965.

5. (a) As security for the $3,500,000 Series A promissory notes, Hooker issued 10 debenture stock certificates. The debenture stock certificates appear to be a pledge of the stock of companies controlled by Hooker, and provided additional protection to the holder of the Series A notes upon default.

(b) The Series B notes were unsecured.

6. (a) In addition to the 10 Series A notes and the 10 Series B notes mentioned in previous findings, Hooker issued to Sun, through its nominee, Murchison Brothers, a note in the face amount of 1,000 Australian pounds, bearing stated interest at the rate of 6*4 percent and repayable in 11 years. The note consisted of 13 pages and provided for an option to the noteholder “by way of redemption of this Note” to purchase at any time during the term of the note 2,000,000 shares of Hooker ordinary stock units upon the payment of 5 shillings per share. The balance of the purchase price for the stock, over and above the portion paid for through the use of the note for this purpose, was to be paid within 1 month of the issuance of the stock. The holder of the note could exercise the option in 1,000 stock units or multiples thereof, and the note would be reduced proportionately.

(b) Paragraph 4 of the note was entitled “Option for Conversion of Shares” and provided as follows:

Corporation [Hooker] hereby grants to Noteholder an option at any time after the date hereof until 3:30 P.M. on December 29, 1976 (herein the “Option Period”) to apply for and have issued to Noteholder by way of redemption of this Note, Two million (2,000,000) ordinary stock units in the capital of Corporation of five shillings (5/-) each paid to twelve one-hundredths of one penny (0.12d) per stock unit and bearing the condition that the balance payable on each stock unit shall be called up by Corporation in full within on© month of the date of issue. Noteholder may exercise its option at any time during the Option Period in whole or in any parts comprising not less than one thousand (1,000) stock units or multiples thereof by delivering this Note Certificate to Corporation together with a form of subscription in the form attached hereto duly executed at any time in which the option is exercisable. Corporation will within fifteen days thereafter
(a)at its expense (including payment by it of any applicable Australian tax) cause to be issued to Noteholder certificates for the number of stock units for which this option has been exercised and (b) return this Note Certificate to Noteholder endorsed to reflect the extent of Noteholder’s exercise of this option and thereafter this option shall be exercisable for that number (or any part thereof comprising multiples not less than one thousand (1,000) stock units or multiples thereof) of the stock units remaining the subject of this option. This Note shall ipso facto be and become redeemed to the extent to which the stock units issued on exercise of option are paid on issue and the extent of redemption shall be endorsed on the Note Certificate.

(c) The instrument was assignable, but the face amount of the note was not prepayable.

7. Under the Australian monetary system in effect as of December 29, 1965, the date of the execution of the note mentioned in finding 6, 20 shillings equaled 1 Australian pound, and 12 pence (Australian pennies) equaled 1 shilling. The parties agreed that the conversion rate of 1 Australian pound would be $2.2425. Hence, the face amount of the 1,000 pound note was $2,242.50, and the option price of 5 shillings per share was $0.560625. (These dollar figures will be used hereinafter.)

8. (a) On the same date, December 29, 1965, pursuant to an assignment agreement, Sun sold the 10 Series A promissory notes in the face amount of $3,500,000, together with the security (the 10 debenture stock certificates), to Keystone Custodian Funds, Inc. (“Keystone”), a Delaware corporation with its principal office in Boston, Massachusetts, for $3,246,250, at a 7)4 percent discount.

(b) This sale was prearranged and authorized by a resolution dated December 20,1965, of the board of directors of Sun.

(c) Sun recorded this transaction on its books by capitalizing the difference of $258,750 as the cost of stock options to acquire 1,750,000 shares of the ordinary stock units of Hooker.

9. (a) The Hooker-Sun transactions mentioned in previous findings were a “package deal,” with each part a component of the entire arrangement for Hooker to obtain $4,002,242.50 in cash. In exchange for the $4,002,242.50 in cash which Sun furnished Hooker directly or through its nominee, Murchison Brothers, Sun received 21 promissory notes with a stated interest rate of 6y2 percent and with a face amount of $4,002,242.50, and an option to acquire 2,000,-000 shares of Hooker ordinary stock at a price of $.56 per share.

(b) The sale of the $3,500,000 Series A promissory notes, together with their collateral security (the debenture stock certificates), by Sun to Keystone, an independent third party, at 92.75 percent of their face amount (a 7% percent discount) for a total purchase price of $3,246,250 was an arm’s-length transaction and established the actual value of the Series A notes to have been $3,246,250.

(c) Similarly, it is reasonable to infer — and it is found— that the actual value of the 10 Series B notes was only 92.75 percent of their face amount of $500,000, or $463,750, and that the actual value of the note mentioned in finding 6, solely as a debt obligation, was only 92.75 percent of its face amount of $2,242.50, or $2,079.92.

(d) Accordingly, it is found that the actual value of the 21 promissory notes which Hooker furnished to Sun was only 92.75 percent of the total face amount of $4,002,242.50, or $3,712,079.92, and that the remainder of the $290,162.58 in cash which Sun furnished to Hooker represented the actual value of the stock option right mentioned in finding 6, which was the only other property acquired by Sun from Hooker.

10. (a) On December 29, 1965, A. D. Haas, a Vice-President of Sun, in a letter to Hooker, stated that if Hooker was able to find a lender who was willing to purchase its serial notes in the face amount of $1,000,000 for $927,500, Sun would be willing to purchase from Hooker such notes in the aforesaid face amount less all expenses of closing, including but not limited to fees of counsel and Interest Equalization Tax, and to sell such notes to the lender at the said price of $927,500. As consideration for Sun purchasing serial notes in the face amount of $1,000,000, Hooker would issue and sell to Sun a second note in the face amount of 181 pounds and 10 shillings ($411.90), with an option entitling the holder to acquire 362,500 shares of the ordinary stock units of Hooker.

(b) Thus, Sun was willing to purchase additional option rights if Hooker was able to locate a lender whose loan, by reducing Hooker’s high-interest debt, would further increase the value of its ordinary stock.

11. (a) The closing of the transaction between Sun and Hooker was expressly conditioned upon a contemporaneous closing for a borrowing of $2,000,000 by Hooker pursuant to a loan agreement dated December 29, 1965, between Hooker and The Company For Investing Abroad, a Pennsylvania corporation.

(b) This $2,000,000 borrowing by Hooker from The Company For Investing Abroad, together with an additional loan of $500,000, was used by Hooker to retire indebtedness which had interest charges of 10 percent or more per annum. The identity of the lender of the additional $500,000 is not disclosed by the record.

12. The board of directors of Hooker, in its 1966 annual report, noted that in December 1965 Hooker obtained loans of $6,500,000 in United States currency, with interest rates of 6 and 6)4 percent per annum, which would enable the company materially to reduce its interest burden.

13. For its fiscal year ending June 30, 1965, Hooker reported earnings before tax of $980,000.

14. (a) On September 15, 1967, Sun was liquidated.

(b) During the period from its acquisition on December 29, 1965, of the note mentioned in finding 6 until the date of its liquidation, Sun did not exercise any of the option rights under paragraph 4 of the note.

15. (a) On September 15,1967, the date of its liquidation, Sun assigned to Murchison Brothers the note mentioned in finding 6 and all of the option rights to acquire 2,000,000 ordinary stock units of Hooker, for a total purchase price of $292,242.50.

(b) Murchison Brothers also acquired the Series B notes in the face amount of $500,000 (although the purchase price therefor is not stated in the record).

16. Prior to its liquidation and on January 31, 1966, Sun filed its Interest Equalization Tax Ketum for the quarter ending December 31, 1965. It reported its acquisition of the Hooker notes at their face amount, i.e., the $3,500,000 Series A notes, the $500,000 Series B notes, and the $2,242.50 note, and as a debt obligation.

17. Sun paid a total Interest Equalization Tax of $197,786.13 on the acquisition of these notes in the following manner:

Period to maturity Series A principal amount Series B principal amount l.E.T.A. rate (percent) Amount o I.E. tax
1 % years less 1 day.. $350,000 $50,000 1.60 $6,000
2)i years less 1 day.— 350,000 60,000 1.85 7,400
3&j years less 1 day_-. 350,000 60,000 2.76 11,000
Q4 years less 1 day. 350,000 60,000 3.66 14.200
5)4 years less 1 day. 350,000 60,000 4.35 17.400
7)4 years less 1 day. 350,000 50,000 5.80 23.200
8)4 years less 1 day.. 350,000 60,000 6.60 26,000
9)4 years less 1 day. 350,000 60,000 7.10 28.400
1034 years less 1 day.... 360,000 60,000 7.70 30,800
11)4 years less 1 day. 350,000 50,000 8.30 33.200
Total.. $197,600
6)4% convertible note certificate I.E.T.A. Bate 8.30% 11 year period to maturity Amount of I.E. Tax $186.13

18.On audit, the Commissioner of Internal Bevenue determined a tax deficiency in the amount of $29,174 against Sun, based upon the following recomputation:

Amount of note l.E.T.A : - rate Amount o Period to maturity Series A Series B (percent) I.E. tax
1% years less 1 day..-•. $324,625 $46,376 1.60 $5,665.00
years less 1 day__ 324,625 46,375 1.85 6,863.60
3)4 years less 1 day. 324,625 46,375 2.76 10,202.50
4)4 years less 1 day-.- 324,625 46,375 3.56 13,170.60
6)4 years less 1 day. 324,625 46,375 4.35 16,138.00
7)4 years less 1 day.- 324,625 46,375 5.80 21,618.60
8)4 years less 1 day. 324,625 46,375 6.60 24,118.00
9)4 years less 1 day... 324,625 46,375 7.10 26,341.00
10)4 years less 1 day. 324,625 46,376 7.70 28,567.00
11)4 years less 1 day.--.. 324,626 46,376 8.30 30,793.00
Total. 3,246,250 463,760 -. 183,274.00
Amount of I.E. tax on convertible note certificate as a debt obligation ($2,242.50X8.30%)..;. $186.13
Amount of I.E. tax on stock options ($290,000X16%). — . 43,600.00
I.E. tax on 6% Series A and Series B notes.... 183,274.00
Total tax. 226,960.13
Amount of tax reported by Sun__ 197,786.13
Tax deficiency. 29,174.00

19. Tiie recomputation was based on the grounds that the Series A and Series B notes were subject to a flat 7^4 percent discount, as evidenced by the sales price of the Series A notes by Sun to Keystone. The $2,242.50 note was taken at face value. The sum of the 7*4 percent discount, $290,000, on the Series A and Series B notes was treated by the Commissioner as the amount that Sun actually paid for the option rights.

20. On August 7,1967, Sun paid to the Internal Eevenue Service $81,783.27, consisting of the tax deficiency of $29,174 plus interest of $2,609.27 accrued thereon.

21. On September 19, 1967, Hooker reimbursed Sun in the amount of $31,783.27 for the tax deficiency and assessed interest thereon paid by Sun to the Internal Eevenue Service.

22. The valuation of Australian securities is — and was in 1965 — subject to the same principles, approaches, and factors that are applicable in the valuation of United States securities.

23. Sometimes the market interest rates or the yield to maturity will vary with years to maturity for equally secured bonds and other debt instruments issued by the same company. At one time, bonds with longer maturities will be selling at a higher market interest rate in the market place than bonds of shorter maturities; and at another time, bonds with shorter maturities may be selling at a higher market interest rate than bonds with longer maturities.

24. The term structure of the market interest rates effective on December 29, 1965, was investigated by comparing the yields to maturity of equally secured bonds and debentures issued by the same company. The debt obligations of four major United States utility companies and a major United States finance company were considered on the basis of their last sales or bid prices for the year 1965. As of December 29, 1965, there was a stable condition in the market, so that, for all practical purposes, the yields to maturity for equally secured bonds or debentures issued by the same company were the same for short and long periods of maturity.

25. With equal yields for different maturities as part of the market structure, it was necessary to ascertain what yield applied to the 6*4 percent Series A and Series B promissory notes of Hooker acquired by Sun, where the parties themselves admitted or agreed by their actions that this 6/¡ percent interest rate was not a market rate of interest. This result followed because Sun allowed Keystone a discount of 7% percent when Sun sold Keystone the $3,500,000 Series A promissory notes. Using a trial and error approach to interpolate the exact figure, the correct yield to maturity was 8.0325 percent for the 6/2 percent Hooker promissory notes acquired by Sun.

26. Using the present or market value upon issuance for the $4,000,000 face amounts of the several maturities of the Hooker Series A and Series B promissory notes with a 614 percent stated interest rate and an 8.0325 percent yield to maturity, the interest equalization tax was calculated to be $180,594.21 for these Hooker promissory notes acquired by Sun. For the $2,242.50 convertible note, a 714 percent discount was applied to obtain present value.

27. The total interest equalization tax on the Hooker promissory notes acquired by Sun was $180,594.21, and the interest equalization tax on the option right, with a value of $290,162.58 at a 15 percent rate, was $43,524.39. The total correct tax was the sum of these two amounts, or $224,123.60. The result is to reduce the deficiency against Sun from $29,174, as computed by the Commissioner, to $26,337.47. Sufi is entitled to a judgment in the amount of this difference, or $2,836.53, plus statutory interest.

Conclusion or Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover to the extent indicated in the opinion, together with interest thereon as provided by law, and judgment is entered to that effect. The amount of the recovery will be determined in further proceedings pursuant to Rule 131(c).  