4 T.C. 294">*295 The Commissioner determined deficiencies as follows:

The questions presented turn on the construction of that part of Treasury Decision 4603 whereby the unamortized discount, premium, and expense on bonds retired prior to November 9, 1935, with the proceeds of new bonds may be amortized over the life of the new bonds.

FINDINGS OF FACT.

Petitioner's books of account were kept and its income tax returns were filed on an accrual basis.

Petitioner is a California corporation having its principal place of business in Los Angeles, California. Its income tax returns were filed for the years in question with the collector of internal revenue for the sixth district in California. It is a public utility engaged in the business of generating and transmitting electricity.

During 1935 petitioner retired four issues of old bonds with the proceeds derived from the sale of new bonds. Those bond issues may be described as follows:

(1) Southern California Edison Co. 1944 U.S. Tax Ct. LEXIS 26">*28 general mortgage 5 percent 30-year gold bonds, dated November 1, 1909, issued under the provisions of a trust indenture dated November 1, 1909, and supplemental indentures dated August 31, 1910, and July 25, 1913, with an aggregate face value of $ 13,360,000. These bonds had been sold at a discount at various dates during the years 1909 through 1915.

(2) Southern California Edison Co. refunding mortgage gold bonds, series of 5's, due 1951, dated July 1, 1926, issued under the provisions of a trust indenture dated October 1, 1923, with an aggregate face value of $ 55,000,000. These bonds had been sold at a discount at various dates during 1926 and 1927.

(3) Southern California Edison Co. refunding mortgage gold bonds, series of 5's, due 1952, dated September 1, 1927, issued under the provisions of the trust indenture dated October 1, 1923, and a supplemental indenture dated March 1, 1927, with an aggregate face value of $ 32,000,000. These bonds were sold at a discount at various dates during 1927 to 1930.

4 T.C. 294">*296 (4) Southern California Edison Co., Ltd., refunding mortgage gold bonds, series of 5's, due 1954, dated June 1, 1929, issued under the provisions of the trust indenture1944 U.S. Tax Ct. LEXIS 26">*29 dated October 1, 1923, and supplemental indenture dated March 1, 1927. These bonds had been issued at a discount at various dates during the years 1929 through 1932.

These four issues of bonds will be spoken of hereafter as the first, second, third, and fourth issues. The first two issues of bonds were called for redemption and retired by petitioner on July 1, 1935, at 105 and accrued interest to date of retirement, in accordance with the terms of the bonds. The funds to retire these two issues of bonds were obtained from the sale for cash on May 1, 1935, of a new series of bonds designated "Southern California Edison Company, Ltd., Refunding Mortgage Gold Bonds, Series of 3 3/4's, due 1960," dated May 1, 1935, with an aggregate face value of $ 73,000,000. These bonds remained outstanding during the years here involved.

The third old issue of bonds was called for redemption and retired by petitioner on September 1, 1935, at 105 and accrued interest to date of retirement, in accordance with the terms of the bonds. The funds to retire this issue of bonds were obtained from the sale for cash on July 2, 1935, of a new issue of bonds designated "Southern California Edison Company, 1944 U.S. Tax Ct. LEXIS 26">*30 Ltd., Refunding Mortgage Gold Bonds, Series 3 3/4's, due 1960," dated July 1, 1935, with an aggregate face value of $ 35,000,000. This new issue has since been retired, as will be set forth below.

The fourth old issue of bonds was called for redemption and retired by petitioner on December 1, 1935, at 105 and accrued interest to date of retirement, in accordance with the terms of the bonds. The funds to retire this issue of bonds were obtained from the sale for cash on September 26, 1935, of a new series of bonds designated "Southern California Edison Company, Ltd., First and Refunding Mortgage Gold Bonds Series of 4's, due 1960," dated September 1, 1935, with an aggregate face amount of $ 30,000,000. These bonds remained outstanding during the years here involved.

On December 28, 1935, petitioner filed with the Commissioner a letter which reads as follows:

December 23, 1935

Commissioner of Internal Revenue,

Washington, D. C.

Dear Sir:

Reference is made to Treasury Decision 4603, which prescribes treatment for income tax purposes of unamortized discount on bonds retired, premium paid upon retirement, and issuance expenses connected therewith.

During the calendar year 1935 Southern1944 U.S. Tax Ct. LEXIS 26">*31 California Edison Company, Ltd., retired four issues of old bonds from the proceeds of the sale of new bonds, as follows:

4 T.C. 294">*297 1. $ 13,360,000 principal amount of Southern California Edison Company General Mortgage 5% 30-year Gold Bonds, Due November 1, 1939, called for redemption and retired on July 1, 1935 at 105 and accrued interest to date of redemption.

2. $ 55,000,000 principal amount of Southern California Edison Company Refunding Mortgage Gold Bonds, Series of 5s, Due 1951, called for redemption and retired on July 1, 1935 at 105 and accrued interest to date of redemption.

Funds for the retirement of the above two issues were obtained from the proceeds of the sale on May 1, 1935 of $ 73,000,000 principal amount of a new issue of Southern California Edison Company, Ltd. Refunding (now designated First and Refunding) Mortgage Gold Bonds, Series of 3-3/4s, Due 1960.

3. $ 32,000,000 principal amount of Southern California Edison Company Refunding Mortgage Gold Bonds, Series of 5s, Due 1952, called for redemption and retired September 1, 1935 at 105 and accrued interest to date of redemption.

Funds for the retirement of these bonds were obtained from the proceeds of sale 1944 U.S. Tax Ct. LEXIS 26">*32 on July 2, 1935 of $ 35,000,000 principal amount of a new issue of Southern California Edison Company Ltd. Refunding (now designated First and Refunding) Mortgage Gold Bonds, Series B 3 3/4s, Due 1960.

4. $ 29,300,000 principal amount of Southern California Edison Company Ltd. Refunding Mortgage Gold Bonds, Series of 5s Due 1954, called for redemption and retired on December 1, 1935 at 105 and accrued interest to date of redemption.

Funds for the retirement of this issue of old bonds were obtained from the proceeds of sale on September 26, 1935 of a new issue of $ 30,000,000 of First and Refunding Mortgage Gold Bonds, Series of 4s, Due 1960.

As to transaction No. 4 set forth above, the date of redemption being December 1, 1935 which is subsequent to November 9, 1935, the date on which Treasury Decision No. 4603 was approved, it is our understanding that the taxpayer has no election as to the treatment of the premium and unamortized discount and unamortized expense, and that the deduction for income tax purposes of these items is to be made in the year of the retirement, and we propose to take the deduction in our return for the calendar year 1935.

As to transactions Nos. 1 and 2 1944 U.S. Tax Ct. LEXIS 26">*33 set forth above, it is our intention also to take the deduction of premium and unamortized discount and expense in the year of retirement, to-wit, the calendar year 1935.

As to transaction No. 3 set forth above, the taxpayer, Southern California Edison Company Ltd., elects and hereby gives notice of its election to have its taxes, so far as the same are affected by this transaction, determined on the basis of the ruling of the Bureau of Internal Revenue heretofore in existence to the effect that the items mentioned (that is, the premium and unamortized discount and unamortized expense attributable to the old bonds retired) should be pro-rated and amortized over the life of the new bonds from the proceeds of sale of which funds were obtained to retire the old bonds, and the taxpayer, as to said transaction No. 3, hereby expressly waives its right to claim a refund or credit on the ground that such items are deductible in the taxable year in which the retirement occurred.

In making the foregoing election, it has been assumed by taxpayer that Treasury Decision No. 4603 permits an election with respect to specified instances of retirement of old issues of bonds from the proceeds of new, 1944 U.S. Tax Ct. LEXIS 26">*34 occurring during the taxable year in question, though such specified instances of retirement do not include all such instances as have taken place during the taxable year prior to the promulgation of said Treasury Decision. If this assumption is correct and it is required 4 T.C. 294">*298 by said Treasury Decision No. 4603 that the election shall apply to all instances of retirement of old bonds from the proceeds of new which have occurred during the taxable year prior to the promulgation of said Treasury Decision, then no election whatever under said Treasury Decision No. 4603 is made by taxpayer by this letter, whether as stated in the preceding paragraph or otherwise.

Very truly yours,

Southern California Edison Company Ltd.

D. M. Trott, Vice-President.

Receipt of the above letter of petitioner was acknowledged by the following letter of January 3, 1936:

Washington, Jan. 3, 1936.

Arthur Andersen and Company,

Munsey Building,

Washington, D. C.

In re: Southern California Edison Co. Ltd., Los Angeles, California.

Sirs:

Receipt is acknowledged of your letter of December 28, 1935, forwarding a letter addressed to the Commissioner under date of December 23, 1935 by the taxpayer named1944 U.S. Tax Ct. LEXIS 26">*35 above relative to the matter of unamortized discount, premium paid upon retirement and issuance expenses connected therewith, on bonds retired during the calendar year 1935. The information is submitted in accordance with Treasury Decision 4603.

Respectfully,

Chas. T. Russell,

Deputy Commissioner,

By (Signed) F. L. Hudson,

Chief of Section.

In its income tax return for the calendar year 1935 petitioner deducted in full the unamortized discount, retirement premiums, and retirement expenses connected with the first, second, and fourth old issues of bonds. These deductions were allowed by the respondent.

Acting in accordance with its letter dated December 23, 1935, petitioner prorated and amortized over the life of the new bonds, known as "Southern California Edison Company, Ltd., First Refunding Mortgage Gold Bonds, Series 'B', 3 3/4's, Due 1960," the unamortized discount, retirement premium, and expense paid by petitioner in retiring the third issue of old bonds, i. e., the $ 32,000,000 series of 5's due 1952. The unamortized discount, retirement premium, and expense paid by petitioner in retiring these last mentioned bonds were as follows:

1944 U.S. Tax Ct. LEXIS 26">*36 The balance of this last mentioned sum remaining unamortized by petitioner at December 31, 1935, amounted to the sum of $ 2,243,224.75, 4 T.C. 294">*299 which petitioner in its income tax returns prorated and amortized over the remaining life of the new bonds at the annual rate of $ 91,560.16. This sum was taken as a deduction in petitioner's income tax returns for each of the four years 1936 to 1939, inclusive, leaving a balance unamortized at December 31, 1939, in the sum of $ 1,876,984.11. In each of the four years the claimed deduction of $ 91,560.16 was disallowed by the respondent. Due to other adjustments, no deficiency resulted in 1937 from the disallowance of the item.

Petitioner's income tax return for 1935 disclosed a net loss of $ 708,303.

During the year 1940 petitioner retired and paid off in cash $ 32,752,000 principal amount, or approximately 94 percent, of its "Refunding Mortgage Gold Bonds, Series 'B', 3 3/4's, Due 1960." Of the above mentioned sum of $ 1,876,984.11, unamortized at December 31, 1939, the amount claimed as a deduction by petitioner in its income tax return for the year 1940 was the sum of $ 1,762,359.87, which sum consisted of $ 1,756,481.71 representing1944 U.S. Tax Ct. LEXIS 26">*37 the portion of the amount unamortized at December 31, 1939, applicable to the $ 32,752,000 of bonds retired in 1940, as aforesaid, and $ 5,878.16 representing annual amortization on the remaining $ 2,248,000 of bonds retired in 1941. The deduction thus claimed by petitioner for the year 1940 was disallowed by the respondent. The balance of these bonds was retired and paid off during the year 1941. The funds for the retirement in 1940 and 1941 of the "Refunding Mortgage Gold Bonds, Series 'B' 3 3/4's, Due 1960," were obtained from the sale of new bonds.

Any of the stipulated facts which have not been embodied in the foregoing findings of fact are incorporated herein by reference.

OPINION.

The issues in this case turn on the proper interpretation of paragraph (a) of Treasury Decision 4603, approved November 9, 1935, XIV-2 C. B. 58 (1935), which reads as follows:

In determining the deductions for income tax purposes of items in respect of the refunding of bonds, the following rules shall apply in the instances specified:

(a) In the case of a retirement of an issue of old bonds from the proceeds of the sale of new bonds any amount paid in excess of the face value of the old bonds, 1944 U.S. Tax Ct. LEXIS 26">*38 less any amount of premium received when issued and not already returned as income, and any unamortized discount and unamortized expense attributable to such bonds, is deductible in the taxable year of their retirement. However, pursuant to the discretion vested in the Commissioner, with the approval of the Secretary, by section 1108 (a) of the Revenue Act of 1926, as finally amended by section 506 of the Revenue Act of 1934, in the case of such retirement of an old issue of bonds prior to the date of the approval of this Treasury decision, the tax for the year of retirement and subsequent taxable years will be determined on the basis of the ruling of the Bureau of Internal Revenue heretofore in existence to the effect that the items mentioned in the first sentence hereof should be prorated and amortized over the life of the new bonds (1) if the 4 T.C. 294">*300 taxable year in which the retirement occurred has been closed on that basis and the tax for such year can not be redetermined, or (2) if, where the taxable year in which such retirement occurred remains open, the taxpayer by a written communication addressed to and filed with the Commissioner of Internal Revenue, Washington, D. C.1944 U.S. Tax Ct. LEXIS 26">*39 on or before January 1, 1936, gives notice of its election to have its taxes determined in accordance with such old ruling and expressly waives in such written communication its right to claim a refund or credit on the ground that such items are deductible in the taxable year in which the retirement occurred. ¹

1944 U.S. Tax Ct. LEXIS 26">*40 We are concerned with the provision by which unamortized discount, premium, and expenses attributable to a bond issue retired prior to the date of approval of the Treasury decision might, at the election of the taxpayer, be amortized over the life of the new bonds, from the proceeds of the sale of which the old bonds had been retired.

The first question presented is whether petitioner has a right of election in respect of the retirement of an old issue of bonds with the proceeds from the sale of new bonds, where it made no similar election regarding other bond issues also retired between January 1 and November 9, 1935. Respondent's position is that where more than one issue of bonds is retired in an open year prior to approval of the Treasury decision there may not be an election with respect to one of those issues while deduction is taken in full in the year of retirement as to the other issue. In other words, respondent removes all emphasis from the use of the singular "a retirement," "an issue of old bonds," and "in the case of such retirement of an old issue of bonds," and reads them as plurals. Under this interpretation the phrase "in the case of a retirement of an old issue1944 U.S. Tax Ct. LEXIS 26">*41 of bonds" becomes "in the case of retirements of all old issues of bonds," with the result that an election under the Treasury decision must be made with respect to all or none of the bond issues retired prior to November 9, 1935.

Petitioner contends that the Treasury decision is to be read literally, so that there is an election as to each issue of bonds.

4 T.C. 294">*301 Before the promulgation of the Treasury decision neither the revenue acts ²1944 U.S. Tax Ct. LEXIS 26">*42 nor the regulations ³ answered the accounting problem as to the tax treatment to be accorded unamortized discount, premium, and expenses connected with an issue of old bonds retired with the proceeds from the sale of new bonds. It was the administrative practice of the Commissioner, however, not to allow as deductions in the year of retirement the unamortized discount on old bonds and premiums and expenses paid on retirement thereof where such bonds were retired with the proceeds from the sale of new bonds. Such items were required to be spread over the life of the new bonds. This practice which required such items to be prorated over the life of the new bonds is referred to in T. D. 4603 as the old rule.

A series of decisions adverse to the Commissioner held that unamortized discount and premium paid on retirement of an old issue of bonds were deductible in full in the year of retirement, even though funds for the retirement were procured from the sale of a new issue of bonds. ⁴San Joaquin Light & Power Corporation v. McLaughlin, 65 Fed. (2d) 677; Helvering v. Union Public Service Co., 75 Fed. (2d) 723; Helvering v. California Oregon Power Co., 75 F. 644;1944 U.S. Tax Ct. LEXIS 26">*43 Helvering v. Central States Electric Corporation, 76 Fed. (2d) 1011. As a result, T. D. 4603 was promulgated reversing the earlier practice, except as to an issue of bonds previously retired on that basis in a year then closed and except that with respect to an issue previously retired in a year still open the taxpayer might elect to amortize the items in question over the life of the new bonds as provided in the old ruling or under the new rule if he made no election.

Both parties agree that the Treasury decision is valid and applicable. The sole dispute is as to what it means. We think that the plain language means that each issue of bonds is to be1944 U.S. Tax Ct. LEXIS 26">*44 treated separately. Either the draftsman intended the taxpayer to have an election as to each bond issue, or else he did not foresee this problem. Further 4 T.C. 294">*302 analysis reaffirms our view on first reading that the election was as to each issue and did not depend on how other issues may have been treated.

The respondent's position is that the words "an issue" have no significance in the phrase "in the case of a retirement of an issue of old bonds." He argues that, since the words are merely used as an example, the phrase has the same meaning as if it were "In the case of the retirement of old bonds." But in San Joaquin Light & Power Co. v. McLaughlin, supra,Helvering v. California Oregon Power Co., supra, and Helvering v. Union Public Service Co., supra, it was pointed out that the earlier Treasury regulations required each bond issue to be treated as separate and distinct. It is true that such statement was made in contrasting an old issue with the new bonds over the life of which the Commissioner had unsuccessfully sought to require the extended amortization. It is, however, 1944 U.S. Tax Ct. LEXIS 26">*45 also true that Treasury Decision 4603 was drafted in the light of these opinions, the last of which had been rendered on January 22, 1935, while the Treasury decision was approved November 9, 1935. The Treasury decision was intended to state a Treasury rule in accord with these decisions. Nothing could have been more natural than to specifically provide for the first time in the Treasury decision that each bond issue be treated as an entity, as had the cases. If this is true, the draftsman designedly chose the terminology, "In the case of a retirement of an issue of old bonds * * *. However * * * in the case of such retirement of an old issue of bonds * * *," in order to treat each bond issue as separate and distinct.

Whether the problem here presented occurred to the draftsman of the Treasury decision or not, certainly the plain import of the language employed required the treatment of each bond issue as an entity. For this reason the argument that the words "an issue" were used figuratively is not sound. The draftsman deliberately used "an issue" to keep the treatment of various issues separate and distinct for computations of unamortized discount and expense in each. 1944 U.S. Tax Ct. LEXIS 26">*46 Even if we assume that such was all the draftsman had in mind in using "an issue," it disproves the argument of respondent that the use of the term was merely exemplary and illustrative.

Furthermore, the Commissioner wrote this Treasury decision and should have known that it would cover a situation like this. He admits as much in agreeing that it is applicable. Either the Treasury decision permits an election as to each issue retired, or it is obscure on the subject and should be construed most strongly against him who wrote it.

We turn now to the second question. The new bonds (series B 3 3/4's, due 1960) the proceeds of which were used to retire the old issue 4 T.C. 294">*303 in 1935 as to which petitioner elected were themselves retired in 1940 with the proceeds of the sale of a second new issue of bonds. Respondent urges that the balance of the old unamortized discount and premium and expense be carried forward over the life of the second new issue of bonds. Respondent's position is untenable for two reasons. First, it is contrary to the specific language of the Treasury decision. Petitioner elected to follow the old rule, in which case the Treasury decision provided: "* * * 1944 U.S. Tax Ct. LEXIS 26">*47 the tax for the year of retirement and subsequent taxable years will be determined on the basis of the ruling of the Bureau of Internal Revenue heretofore in existence to the effect that the items mentioned in the first sentence hereof should be prorated and amortized over the life of the new bonds * * *." (Italics added.) There is nothing here said about a second new issue of bonds which replaced this new issue. No election is provided in years after 1935. The election was given only to prevent hardship to the taxpayer who had retired his bonds before the new ruling. No such hardship exists in connection with retirements after 1935, since the taxpayer is now apprised of the new rule before he acts. Furthermore, it seems obvious that the new rule as set forth in the first sentence of paragraph (a) of the Treasury decision is controlling as to such retirement. If we consider the case of an old issue of bonds retired prior to 1935 and as to which retirement the taxable year was closed at the date of the Treasury decision, so that no election was given and the old rule was followed of amortizing over the life of the new issue, it would seem clear that on retirement of that new1944 U.S. Tax Ct. LEXIS 26">*48 issue after 1935, the new rule required by the court decisions must be followed. The unamortized discount, premium, and expense must be deducted in 1940, the year of retirement.

Decision will be entered under Rule 50.