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Taxable and Business Income

"All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligation of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest from which is wholly exempt from taxes imposed by this chapter." Though the statement is apparently clear and unambiguous, its application has aroused much litigation and controversy. To a considerable extent the problems have arisen in connection with what, to the uninitiated, must seem rather unusual business relationships. Some transactions, in fact, appear to be in the form they are primarily to gain the tax advantage of the interest. | This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title Taxable and Business Income Volume Author Editor Dan Throop Smith and J. Keith Butters Volume Publisher UMI Volume ISBN 0-870-14118-X Volume URL http www.nber.org books smit49-1 Publication Date 1949 Chapter Title Interest Purchase and Retirement of Bonds Bond Premium and Discount Chapter Author Dan Throop Smith J. Keith Butters Chapter URL http www.nber.org chapters c3244 Chapter pages in book p. 124 - 139 Chapter 6 Interest Purchase and Retirement of Bonds Bond Premium and Discount A Interest The Internal Revenue Code Section 23 b PROVIDES IN simple terms for a deduction of All interest paid or accrued within the taxable year on indebtedness except on indebtedness incurred or continued to purchase or carry obligations other than obligation of the United States issued after September 24 1917 and originally subscribed for by the taxpayer the interest from which is wholly exempt from taxes imposed by this chapter. Though the statement is apparently clear and unambiguous its application has aroused much litigation and controversy. To a considerable extent the problems have arisen in connection with what to the uninitiated must seem rather unusual business relationships. Some transactions in fact appear to be in the form they are primarily to gain the tax advantage of the interest deduction. To prevent abuse of the allowance for interest deductions various rules have been set up that must be met before an interest deduction is allowed for example the interest must have been paid on a bona fide debt and the debt must be that of the payer. None of the special rules is likely to be of any significance to corporations with bonds or debentures outstanding or in cases involving loans from banks finance companies public lending agencies and other disinterested lenders. Most of the 124 CHAPTER 6 125 exceptions and qualifications to interest deductions relate .