showed a gross income of $960,000, all of which was dividend income, and it also showed a deduction for distributions to beneficiaries in the amount of $960,000. Respondent determined that the trust realized income in the nature of a distribution from the Journal Company in the amount of $45,000 in each of the years 1956 and 1957, with the explanation that in each of those years, "$45,000.00 represents a net cost incurred by The Journal Company for the purpose of enabling you to acquire 15,000 shares of The Journal Company stock." OPINION. By pleading admissions it is established that the trust was formed for the purpose of enabling employees of the Journal Company to acquire and hold, during the periods of their employment, a beneficial interest in shares of capital stock of the Journal Company. The direct sale of its stock by the Journal Company to its employees would not accomplish this result for it would not confine future stockholders to employees. The trust entity was merely a facility in conventional form used to effectuate the underlying purpose of lodging the beneficial interest and control of the Journal Company in its active employees. The trust held legal title to the stock transferred to it but that is about all for it could not vote the stock or retain any dividends. By issuing trust certificates for each share with rights and restrictions as to transfer it merely implemented the plan of placing and keeping the beneficial interest in the Journal Company in its active employees. We just cannot perceive any theory on which to found an argument that the trust received income by reason of the transactions whereby the Journal Company bought its stock, transferred it to the trust for trust certificates, and sold the trust certificates to employees. As we read respondent's brief he seems to contend that the petitioner trust received dividend income upon the net effect of the entire transaction whereby the trust, as the majority stockholder of the Journal Company, caused the corporation in "a prearranged and preconceived scheme" to contract for the purchase of Journal stock from the Wilmington Trust Company "fully intending the stock to be acquired by [the petitioner trust] and a portion of the cost to be borne by The Journal Company." Respondent then argues that viewing the transaction as a whole "no other conclusion can be reached than that corporate funds to the extent of $3.00 per share were siphoned from The Journal Company for the benefit of its major stockholder [the petitioner trust] in partial payment of the cost of stock acquired by [the petitioner trust]." There is no merit in this contention. The trust may have been the major stockholder but it could not, as a stockholder, cause the corporation to do anything. It could not vote the stock it held. The trust received no benefit at all from the transactions. The fact that the Journal Company saw fit to sell the certificates to its employees (some but not all of whom were former certificate holders) at a price less than it paid for stock is immaterial. The Journal Company bestowed no benefit on the trust by such sales.1 In fact, it might be said the trust suffered a detriment for the stock it held was reduced in book value by the reduction of the Journal Company's surplus by $45,000 each year. Under respondent's theory the so-called dividend distribution is from the Journal Company to the trust. The Journal Company's action in selling the trust certificates at the formula-computed price ($3 less than the cost per share of the stock) might have benefited company employees but it was certainly of no benefit to the trust. We hold that the petitioner trust did not realize dividend income in 1956 and 1957 as a result of the transactions outlined above. Decision will be entered for the petitioner. ALBERT J. AND SYLVIA ADES, ET AL.,1 PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket Nos. 79388-79391. Filed July 27, 1962. A partnership and certain individuals purchased convertible and callable bonds at a premium. Before amortizing the part of that premium not attributable to the conversion feature, they converted the bonds into common stock. Held, the unamortized part of such bond premium at the date of conversion is not an allowable deduction in the year of conversion. Marvin S. Machson, Esq., for the petitioners. Dean P. Kimball, Esq., for the respondent. OPINION. FORRESTER, Judge: Respondent has determined deficiencies in income tax and additions thereto as follows: 1 There was no limitation as to the price at which it could sell the certificates. 1 Proceedings of the following petitioners are consolidated herewith: Alan and Ruth Ades, Docket No. 79389; Robert Ades, Docket No. 79390; and Joseph and Rachel Ades, Docket No. 79391. Certain adjustments have been conceded by all petitioners, and petitioners in Docket No. 79391 have abandoned the question of the addition to tax for 1955. The sole issue remaining for consideration is whether petitioners may deduct the premiums paid for certain convertible and callable bonds during the year in which they were converted into the stock of the issuing corporation. All of the facts have been stipulated and are so found. All petitioners are individuals who filed their income tax returns for the years involved as follows: Some of the petitioners herein (joint returns were filed by petitioners in Docket Nos. 79388, 79389, and 79391) owned interests in a partnership known as Bon Marche Co. Their shares in profits and losses of said partnership during the taxable years herein involved were as follows: Bon Marche Co. filed income tax returns for its fiscal years ending July 31, 1954, and July 31, 1955, with the district director of internal revenue, Upper Manhattan, New York. The partnership purchased certain convertible 334-percent debentures of American Telephone & Telegraph Company, dated December 10, 1953, and due December 10, 1965. During its fiscal years ending on July 31, 1954, and July 31, 1955, it converted these debentures to stock as shown in the following table: |